Small PowerShares Financial Services ETF Merits Attention

The financial services sector, the S&P 500’s second-largest sector weight, has been a stout performer this year, but headwinds have arisen in recent weeks that make this earnings season a pivotal one for scores of ETFs tracking the sector. Put the PowerShares Dynamic Financial Sector Portfolio (NYSEArca: PFI) on that list.

PFI is small with just $23.2 million in assets under management, but the ETF has offered sizable returns this year posting a gain of 18.1%. There is an obvious reason why PFI is one financial services ETF to watch this earnings season: Heavy exposure to the insurance sub-sector. All of PFI’s top-10 holdings are insurance stocks, something that served the ETF and its rivals well when Treasury yields spiked earlier this year. [This Financial Services ETF has it All]

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. Said another way, when the Federal Reserve surprised markets by not altering its easing program, rate-sensitive insurance and regional bank ETFs were stung. In addition to large-cap insurers, PFI has significant regional bank exposure. [Fed Clues Propel Insurance ETFs]

For PFI and its rivals, the potential for good news comes in the form of Fed Chairman Ben Bernanke’s looming retirement.  President Obama will allow Bernanke to retire when his term ends next January. Assuming that happens and Bernanke’s successor is selected from the current pool of Fed governors, it is not far flung that someone with more hawkish views could be chosen to be the next central bank chief.

With an important earnings season imminent, PFI’s index construction should be highlighted. The Dynamic Financial Sector Intellidex Index “evaluates companies based on a variety of investment merit criteria, including: price momentum, earnings momentum, quality, management action, and value,” according to PowerShares.