This Financial Services ETF Has it All

Investors looking for sector ETFs that have delivered the goods in recent months do not have look far beyond financial services, the second-largest sector weight in the S&P 500. Over the past 90 days, the Financial Select Sector SPDR (NYSEArca: XLF) has tacked on a tidy 10.7% compared to a gain of 5.9% for the S&P 500.

XLF, which is heavy on big banks such as Wells Fargo (NYSE: WFC) and J.P. Morgan Chase (NYSE: JPM), is far from the only financial services ETF thriving these days. Buoyed by rising interest rates and speculation those rates will only move higher, regional bank ETFs such as the SPDR S&P Regional Banking ETF (NYSEArca: KRE) have soared. KRE is up 16.6% since April 9. [Regional Bank ETFs in Focus on Higher Rates]

Insurance ETFs have gotten in on the act as well with the SPDR S&P Insurance ETF (NYSEArca: KIE) turning in a 90-day gain of 8.2%. ETFs with tilts toward brokerage houses and investment banks have climbed, too. [Insurance ETFs Get a Lift From Rising Interest Rates]

Investors looking to do some one-stop shopping with financial services ETFs may want to consider the First Trust Financials AlphaDEX Fund (NYSEArca: FXO). FXO has gained 8% in the past 90 days, proving itself to be a credible rising rates play in the process. A 37.3% weight to insurance companies has helped.

Many insurance companies hold onto longer-duration bonds and have been hurt by low interest rates – the companies keep the holdings until maturity. Looking ahead, higher rates will help insurers earn higher returns on their investments. FXO does not skimp on traditional banks and capital markets firms as those sub-sectors combine for over 27% of the fund’s weight.

Unlike some of the larger financial services ETFs, FXO does not use traditional cap-weighting to build its lineup. FXO’s 168 holdings are ranked by a variety of factors such as price appreciation, return on assets and price-to-boo ratio. [First Trust Profile]

The result is an ETF that does not devote more than 1.04% to any individual holding, but also an ETF that has slightly outperformed XLF this year while being noticeably less volatile. FXO offers something for value investors as well as the ETF is home to a dozen stocks held in the equity portfolio of Warren Buffett’s Berkshire Hathaway (NYSE: BRK-A).