In terms of market cap spectrums and sectors, there are at least two certainties in the current market environment. First, small-caps are on fire. Last Friday, three small-cap exchange traded funds made new highs and the Russell 2000 is up more than 2% over the past month.
Second, amid all the fervor about rising interest rates, financial services equities and ETFs are spending ample, deserved time in the limelight. After being on the receiving end of $545 million of inflows last month, the Financial Select Sector SPDR (NYSEArca: XLF) has added $1.3 billion in new assets since the start of June. [Promising Signs for Bank ETFs]
Combining financial services and small-caps under the umbrella of one ETF is a reality with the PowerShares S&P SmallCap Financials Portfolio (NasdaqGM: PSCF), the small-cap answer to the widely followed XLF. The $121.8 million PSCF debuted in April 2010 and is home to 124 stocks, none of which command more than 2% of the ETF’s weight.
Smaller banks, notably community banks, have suffered as sweeping regulations under the Dodd–Frank Wall Street Reform and Consumer Protection Act pressure profits. However, the smaller banks are pressuring regulators to relax rules that were meant for larger banks. [Small Bank, Financial ETFs Could Capitalize on Looser Regulations]
PSCF allocates a third of its weight to real estate investment trusts (REITs), making REITs the ETF’s second-largest industry weight and implying some level of sensitivity to rising interest rates. However, PSCF more than offsets its REIT exposure with a 35.3% weight to banks, mostly of the regional and community variety, as well as an 11.3% weight to insurance providers.
The sensitivity of insurance ETFs and their holdings to Treasury yields will continue to figure prominently in the funds’ near-term performance. The reason: Insurance companies make profit from spreads between what they owe policyholders and bond yields. The higher the Treasury yield, the better for insurance providers. [Insurance ETFs Wait on Higher Rates]
Small banks have been left relatively unscathed by the recent bout of litigation fees and regulatory fines levied onto the larger banks. An improving U.S. economy could foster increased borrowing and financing by businesses, large and small, across the U.S. while benign mortgage rates could also provide a lift to the mortgage lending operations of community and regional banks.
Investors have allocated $2.14 million to PSCF over the past month, according to PowerShares data.
PowerShares S&P SmallCap Financials Portfolio