If you’re confused as to why the market has been rallying, it’s primarily due to the Federal Reserve announcing that it expects to hike rates twice this year compared to the previous expectation of four hikes.
With the U.S. dollar struggling and now at an eight-month low, and most markets around the world rallying, some investors might ask why anyone would want the Federal Reserve to move interest rates higher. The most obvious reason is savings. Retirees, as well as those attempting to save for retirement, are being slammed by low interest rates. The low-interest rate environment has also led to aggressive borrowing and excessive debt levels, which must eventually be repaid. While risk-taking investors have benefited from low rates, Main Street has not. If there have been any benefits for Main Street, they’re not significant or sustainable. Then there’s the risk of the U.S. dollar becoming too weak and losing its role as the world’s reserve currency. (For more, see: The 6 Strongest Currencies vs. the U.S. Dollar in 2016.)
Currently, the Federal Reserve is keeping rates low because it’s fighting against deflation. Eventually interest rates must move higher. However, there is no telling when that will happen. If you think it will happen sooner rather than later, then you might want to consider one of the financial exchange-traded funds (ETFs) below.
Financial ETFs
Let’s take a look at what each of eight financial ETFs below tracks followed by a chart featuring key metrics. (For more, see: PGF vs. KBE: Comparing Financials ETFs.)
- The PowerShares Financial Preferred ETF (PGF) tracks the Wells Fargo Hybrid Preferred Securities Financial Index.
- The Financial Select Sector SPDR ETF (XLF) tracks the Financial Select Sector Index.
- The PowerShares DWA Financial Momentum ETF (PFI) tracks the Dorsey Wright Financial Technical Leaders Index.
- The First Trust Financials AlphaDEX ETF (FXO) tracks the StrataQuant Financial Index.
- The iShares US Financials (IYF) tracks the Dow Jones U.S. Financials Index.
- The Vanguard Financials ETF (VFH) tracks the MSCI U.S. Investable Market Index Financials 25/50.
- The iShares US Broker-Dealers & Securities and Exchanges (IAI) tracks the Dow Jones Select Investment Services Index.
- The iShares US Regional Banks (IAT) tracks the Dow Jones U.S. Select Regional Banks Index.
Key Metrics
Net Assets
|
Volume
|
Expense Ratio
|
1-Year Performance
|
Dividend Yield
| |
PGF
|
$1.59 billion
|
771,571
|
0.63%
|
0.24%
|
5.66%
|
XLF
|
$16 billion
|
64,000,000
|
0.15%
|
-9.00%
|
2.21%
|
PFI
|
$36.34 million
|
4,910
|
0.60%
|
-5.00%
|
1.29%
|
FXO
|
$712.68 million
|
408,644
|
0.64%
|
-6.56%
|
1.54%
|
IYF
|
$1.14 billion
|
684,594
|
0.43%
|
-7.06%
|
1.81%
|
VFH
|
$3.70 billion
|
625,147
|
0.10%
|
-8.52%
|
2.21%
|
IAI
|
$112.31 million
|
115.903
|
0.43%
|
-16.64%
|
1.91%
|
IAT
|
$411.71 million
|
374,165
|
0.43%
|
-11.75%
|
2.10%
|
If you were to only look at the numbers above, you would likely be inclined to do further research on PGF prior to all others. Or, if you’re seeking liquidity for an in-and-out trade, then you might look into XLF. And if you wanted to invest in a financial ETF with a low expense ratio, then you might consider VFH and XLF first.
That all makes sense, but with the chart above doesn’t show is that FXO and PFI have been the best performers since 2007, appreciating approximately 9.52% and 19.49%, respectively. The likely reason for the outperformance, despite the higher expense ratios, is that these ETFs are based on alpha-seeking mechanisms and momentum.
The Bottom Line
If the Federal Reserve remains dovish, then you don’t want to go anywhere near any of these ETFs. If you believe there will indeed be rate hikes around the corner, then you might want to conduct further research on at least one of the options above. (For more, see: The Top 5 Financials Sector ETFs for 2016.)
Dan Moskowitz does not have any positions in the ETFs mentioned in this article.
