{"id":2759,"date":"2021-08-10T15:49:33","date_gmt":"2021-08-10T15:49:33","guid":{"rendered":"http:\/\/blog.valuengine.com\/?p=2759"},"modified":"2021-08-10T15:49:33","modified_gmt":"2021-08-10T15:49:33","slug":"inside-bank-and-financial-etfs-how-do-they-compare","status":"publish","type":"post","link":"http:\/\/blog.valuengine.com\/index.php\/inside-bank-and-financial-etfs-how-do-they-compare\/","title":{"rendered":"Inside Bank and Financial ETFs: How Do They Compare?"},"content":{"rendered":"<p><span style=\"font-weight: 400;\">Two other analysts whose blogs I monitor wrote in their midyear reports that they were bullish on bank and financial ETFs. My analysis using ValuEngine data below differs significantly.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">One analyst singled out KRE and the other\u2019s favorite was FTXO.\u00a0 They cited that the P\/B and P\/E ratios were considerably lower than the market averages.\u00a0 Moreover, since the economic expansion is expected to continue and banks must play an essential role in such an expansion, they argued that the recent surge in prices of these ETFs still had plenty of room to run further.\u00a0 <\/span><span style=\"font-weight: 400;\">I was intrigued enough to feature these ETFs in this week\u2019s blog.\u00a0 I also included the two largest ETFs in the sector as ranked by AUM: XLF and VLH.\u00a0 Here is my dive into the comparative numbers for the following ETFs:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">XLF, Financial Select Sector SPDR Fund<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">VFH, Vanguard Financials ETF<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">KRE, SPDR S&amp;P Regional Banking ETF<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">FTXO, First Trust Nasdaq Bank ETF<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">The following table provides much of the pertinent information available as of August 1, 2021.\u00a0 IVV, the iShares S&amp;P 500 ETF, is used for benchmarking.<\/span><\/p>\n<table>\n<tbody>\n<tr>\n<td><\/td>\n<td><b>XLF<\/b><\/td>\n<td><b>VFH<\/b><\/td>\n<td><b>KRE<\/b><\/td>\n<td><b>FTXO<\/b><\/td>\n<td><b>IVV<\/b><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">ValuEngine Rating<\/span><\/td>\n<td><span style=\"font-weight: 400;\">1<\/span><\/td>\n<td><span style=\"font-weight: 400;\">1<\/span><\/td>\n<td><span style=\"font-weight: 400;\">1<\/span><\/td>\n<td><span style=\"font-weight: 400;\">1<\/span><\/td>\n<td><span style=\"font-weight: 400;\">3<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">1-Yr Forecast Return<\/span><\/td>\n<td><b>-8.9%<\/b><\/td>\n<td><span style=\"font-weight: 400;\">-9.0%<\/span><\/td>\n<td><span style=\"font-weight: 400;\">-11.4%<\/span><\/td>\n<td><span style=\"font-weight: 400;\">-12.07%<\/span><\/td>\n<td><b>-4.0%<\/b><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">1-Yr Historical Return\u00a0<\/span><\/td>\n<td><span style=\"font-weight: 400;\">52.04%<\/span><\/td>\n<td><span style=\"font-weight: 400;\">52.92%<\/span><\/td>\n<td><span style=\"font-weight: 400;\">64.92%<\/span><\/td>\n<td><b>69.17%<\/b><\/td>\n<td><span style=\"font-weight: 400;\">35.50%<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">3-Yr Historical Return<\/span><\/td>\n<td><b>9.06%<\/b><\/td>\n<td><span style=\"font-weight: 400;\">8.26%<\/span><\/td>\n<td><span style=\"font-weight: 400;\">0.43%<\/span><\/td>\n<td><span style=\"font-weight: 400;\">0.59%<\/span><\/td>\n<td><b>10.63%<\/b><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">5-Yr Historical Return<\/span><\/td>\n<td><span style=\"font-weight: 400;\">9.47%<\/span><\/td>\n<td><b>12.94%<\/b><\/td>\n<td><span style=\"font-weight: 400;\">10.69%<\/span><\/td>\n<td><span style=\"font-weight: 400;\">8.39%<\/span><\/td>\n<td><b>14.28%<\/b><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">10-Yr Historical Return<\/span><\/td>\n<td><span style=\"font-weight: 400;\">13.55%<\/span><\/td>\n<td><b>13.26%<\/b><\/td>\n<td><span style=\"font-weight: 400;\">N\/A<\/span><\/td>\n<td><span style=\"font-weight: 400;\">N\/A<\/span><\/td>\n<td><b>14.78%<\/b><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">Volatility<\/span><\/td>\n<td><span style=\"font-weight: 400;\">24.3%<\/span><\/td>\n<td><b>22.0%<\/b><\/td>\n<td><span style=\"font-weight: 400;\">30.7%<\/span><\/td>\n<td><span style=\"font-weight: 400;\">30.9%<\/span><\/td>\n<td><b>15.1%<\/b><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">Sharpe Ratio\u00a0<\/span><\/td>\n<td><span style=\"font-weight: 400;\">0.39<\/span><\/td>\n<td><b>0.59<\/b><\/td>\n<td><span style=\"font-weight: 400;\">0.35<\/span><\/td>\n<td><span style=\"font-weight: 400;\">0.27<\/span><\/td>\n<td><b>0.94<\/b><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\"># of Stocks<\/span><\/td>\n<td><span style=\"font-weight: 400;\">68<\/span><\/td>\n<td><b>399<\/b><\/td>\n<td><span style=\"font-weight: 400;\">133<\/span><\/td>\n<td><span style=\"font-weight: 400;\">31<\/span><\/td>\n<td><b>500<\/b><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">% Labeled<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Undervalued by VE<\/span><\/td>\n<td><span style=\"font-weight: 400;\">36%<\/span><\/td>\n<td><span style=\"font-weight: 400;\">63%<\/span><\/td>\n<td><b>75%<\/b><\/td>\n<td><span style=\"font-weight: 400;\">50%<\/span><\/td>\n<td><span style=\"font-weight: 400;\">36%<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">VE Beta<\/span><\/td>\n<td><b>1.26<\/b><\/td>\n<td><b>1.26<\/b><\/td>\n<td><span style=\"font-weight: 400;\">1.52<\/span><\/td>\n<td><span style=\"font-weight: 400;\">1.55<\/span><\/td>\n<td><b>1.00<\/b><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">VE Alpha<\/span><\/td>\n<td><b>0.05<\/b><\/td>\n<td><b>0.05<\/b><\/td>\n<td><span style=\"font-weight: 400;\">0.04<\/span><\/td>\n<td><span style=\"font-weight: 400;\">0.04<\/span><\/td>\n<td><span style=\"font-weight: 400;\">0.00<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">P\/B Ratio<\/span><\/td>\n<td><span style=\"font-weight: 400;\">1.6<\/span><\/td>\n<td><span style=\"font-weight: 400;\">1.7<\/span><\/td>\n<td><b>1.3<\/b><\/td>\n<td><b>1.3<\/b><\/td>\n<td><span style=\"font-weight: 400;\">4.7<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">P\/E Ratio<\/span><\/td>\n<td><span style=\"font-weight: 400;\">13.6<\/span><\/td>\n<td><span style=\"font-weight: 400;\">13.0<\/span><\/td>\n<td><b>12.1<\/b><\/td>\n<td><span style=\"font-weight: 400;\">13.6<\/span><\/td>\n<td><span style=\"font-weight: 400;\">33.6<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">Div. Yield<\/span><\/td>\n<td><span style=\"font-weight: 400;\">1.6%<\/span><\/td>\n<td><span style=\"font-weight: 400;\">1.8%<\/span><\/td>\n<td><b>2.2%<\/b><\/td>\n<td><span style=\"font-weight: 400;\">1.8%<\/span><\/td>\n<td><span style=\"font-weight: 400;\">1.3%<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">Expense Ratio<\/span><\/td>\n<td><span style=\"font-weight: 400;\">0.12%<\/span><\/td>\n<td><b>0.10%<\/b><\/td>\n<td><span style=\"font-weight: 400;\">0.35%<\/span><\/td>\n<td><span style=\"font-weight: 400;\">0.60%<\/span><\/td>\n<td><b>0.03%<\/b><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">Index Provider<\/span><\/td>\n<td><span style=\"font-weight: 400;\">S&amp;P Dow Jones\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Indexes<\/span><\/td>\n<td><span style=\"font-weight: 400;\">MSCI<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Keefe, Bruyette &amp; Woods<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Nasdaq<\/span><\/td>\n<td><span style=\"font-weight: 400;\">S&amp;P Dow Jones\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Indexes<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">Index<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Scheme<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Mkt. Cap Weighting<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Mkt. Cap Weighting<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Equally Weighted<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Factor Weighted (Volatility, Value, Growth)<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Mkt. Cap Weighting<\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"font-weight: 400;\">ETF Sponsor<\/span><\/td>\n<td><span style=\"font-weight: 400;\">SPDR by SSgA<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Vanguard<\/span><\/td>\n<td><span style=\"font-weight: 400;\">SPDR by SSgA<\/span><\/td>\n<td><span style=\"font-weight: 400;\">First Trust<\/span><\/td>\n<td><span style=\"font-weight: 400;\">iShares by Blackrock<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><span style=\"font-weight: 400;\"><br \/>\nSalient observations we can make:<\/span><\/p>\n<ol>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The ValuEngine models very strongly disagree with the two analysts.\u00a0 All four ETFs get ValuEngine\u2019s lowest rank of 1.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">While the 12-month outlook for the S&amp;P 500 as represented by IVV is negative at -4%, all four Financial Sector ETFs are expected to fall more than twice as much.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Given that all four ETFs significantly underperformed in the past 3-, 5- and 10-year periods, the 1-year superior return for all four just looks like an expected mathematical consequence of having started from a lower base when the mammoth rising tide lifted all boats from April 2020 into this year.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The earnings forecasts for these ETFs while respectable enough do not justify additional deployment of assets away from broad market index ETFs or core mutual funds into any of these four financial sector ETFs.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Although it is true that the Sector ETFs have higher dividend yields, substantially lower P\/E ratios and higher P\/B ratios, that is expected to be the case in most environments.\u00a0 Banks are highly regulated with capital requirements that necessitate high book values.\u00a0 There are also implicit risks surrounding the relative opaqueness of bank operations that have resulted in past disasters.\u00a0 As a result, investors tend to require higher dividend yields and higher earnings\/price ratios than they do from consumer-oriented sectors.\u00a0<\/span><\/li>\n<\/ol>\n<p><span style=\"font-weight: 400;\">Although our metrics do not support new investment in banks and financial services stocks over other segments of the market, some of our readers may want to despite our concerns.\u00a0 So let us take a deeper dive just comparing the four ETFs excluding IVV.<\/span><\/p>\n<ol>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">One major difference is the overall target. XLF and VFH attempt to capture the entire financial sector including other types of financial services firms.\u00a0 KRE and FTXO exclusively hold banks.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">XLF and VFH are weighted by market cap.\u00a0 KRE is equally weighted.\u00a0 The components of FTXO are algorithmically weighted to maximize exposure to value, earnings growth and low volatility factors.\u00a0\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">With its 400+ holdings, VFH is easily the most well diversified of the four ETFs and has delivered generally superior historical returns with considerably lower volatility for the lowest expense ratio, just 10 basis points.\u00a0\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Of the two financial sector ETFs, both market-cap weighted, there seems little reason to select XLF over VFH.\u00a0 It has a slightly higher fee and far more concentration risk.\u00a0 In fact, XLF gives considerably higher weighting to the same top ten holdings than VFH simply because it holds so many fewer stocks, all concentrated in exceptionally large market cap stocks.\u00a0\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Comparing the two banks-only ETFs, KRE has the much lower expense ratio.\u00a0 In terms of value characteristics, KRE is the best of the four ETFs with the highest yield, lowest P\/E ration and lowest price\/book ratio. KRE also contained the highest percentage of stocks considered undervalued by ValuEngine\u2019s models as well as the top 12-month momentum as of July 11, 2021.\u00a0 KRE is much more diversified than FXTO.\u00a0 Its highest weighting, Silvergate Capital, comprised 1.9% and the other common holding in its top 10, PNC Financial constituted 1.7% of its portfolio.\u00a0 In contrast, PNC comprised 8.2% of FTXO and Silvergate had a weight of 4%. The highest weighting in VFH was JP Morgan Chase.\u00a0 Empirically, the choice is clear between KRE and FTXO in the five years that FXTO has been trading.\u00a0 An investor looking to add extra regional bank exposure as a satellite equity position would derive more diversification and more potential for extraordinary returns with less expected price volatility from KRE.\u00a0\u00a0<\/span><\/li>\n<\/ol>\n<p><span style=\"font-weight: 400;\">In conclusion, ValuEngine\u2019s models indicate that most investors are probably better off deriving their financial services exposures through large benchmark ETFs than adding a financial services ETF to the mix.\u00a0 That said, different investors interpret market opportunities differently.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Those who wish to shift some of the core to the financial services sector despite ValuEngine\u2019s timing advice would be better off implementing this strategy with VFH than with XLF.\u00a0 Investors whose insights tell them that regional banks are worthy of an investment as a new satellite position should probably focus on KRE and eliminate FTXO from consideration.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Two other analysts whose blogs I monitor wrote in their midyear reports that they were bullish on bank and financial ETFs. My analysis using ValuEngine data below differs significantly. One analyst singled out KRE and the other\u2019s favorite was FTXO.\u00a0 They cited that the P\/B and P\/E ratios were considerably lower than the market averages.\u00a0 &#8230; <a title=\"Inside Bank and Financial ETFs: How Do They Compare?\" class=\"read-more\" href=\"http:\/\/blog.valuengine.com\/index.php\/inside-bank-and-financial-etfs-how-do-they-compare\/\" aria-label=\"More on Inside Bank and Financial ETFs: How Do They Compare?\">Read more<\/a><\/p>\n","protected":false},"author":7,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[130,1,39],"tags":[1854,1857,1856,1576,1704,1760,1761,1719,1733,1853,1855,1852,1731,1770,1851,1471,93,28,1656,1659,63,1850,1849],"_links":{"self":[{"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/posts\/2759"}],"collection":[{"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/users\/7"}],"replies":[{"embeddable":true,"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/comments?post=2759"}],"version-history":[{"count":1,"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/posts\/2759\/revisions"}],"predecessor-version":[{"id":2760,"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/posts\/2759\/revisions\/2760"}],"wp:attachment":[{"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/media?parent=2759"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/categories?post=2759"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/tags?post=2759"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}