Dodge Post-Election Financials Fallout With This ETF
Several things about the financial services sector are widely known. First, the group has been the source of much controversy and angst for investors over the past several years. Second, it is the second-largest sector weight in the S&P 500 behind technology.
Third, financial services names have, broadly speaking, been excellent performers this year. Fourth, those bull runs were seen as endangered if President Obama won reelection. Finally, the President did win and financials have subsequently slumped. Over the past five trading days, the Financial Services Select Sector SPDR (NYSE: XLF) has tumbled 3.6 percent.
There are multiple reasons for the post-election fallout among bank stocks, including that investors are simply taking profits in anticipation of higher capital gains taxes in 2013.
"Anytime a sector has such a strong run compared to other sectors, it certainly becomes susceptible to investors taking profits and redeploying their funds elsewhere—especially given the president's proposal to raise capital gains taxes on higher-income investors," WisdomTree Research Director Jeremy Schwartz said in a note.
Predictably, investors and bankers themselves are concerned about the regulatory outlook facing the sector. After all, the Dodd-Frank legislation was passed under President Obama's watch and with his reelection, repeal of that law seems unlikely.
"Investors are concerned about the financial sector's potential moving forward due to the election results. With the re-election of President Obama, the increased regulations of the Dodd-Frank Act are now unlikely to be repealed," according to Schwartz. "Some of the run-up in financials may have been a belief that Governor Romney had the potential to come in and scale back some of the harsher regulations contained in this law."
With a potential return to turbulent times looming for bank stocks, investors should consider some ETFs with reduced (or no) exposure to the financial services sector. Enter the WisdomTree Dividend ex-Financials Fund (NYSE: DTN), which has almost $1.2 billion in assets under management.
DTN debuted in June 2006, making it one of the first ETFs to find success with the "ex" sector strategy. Excluding bank stocks when times are bad for that group makes an obvious difference when it comes to returns. For example, DTN is down 4.7 percent over the past five years while the iShares Dow Jones Select Dividend Index Fund (NYSE: DVY), which today features a nearly 10 percent allocation to financials, is off 16.2 percent over the same five-year period.
Over the past three years, DTN has crushed DVY and the SPDR S&P Dividend ETF (NYSE: SDY). With less volatility than its rivals, DTN has returned 54.2 percent, including dividends paid, since November 2009. DVY is up 46.3 percent over the same time while SDY has gained 36.7 percent.
Adding to DTN's allure is the fact that it pays a monthly dividend, providing investors with a steadier stream of income.
"We believe DTN offers a means to generate continued exposure to dividend-paying U.S. equities while avoiding the financial sector—all the more important as a potential source of income when interest rates remain at historic lows," wrote Schwartz.
DTN charges 0.38 percent per year. Consumer staples and utilities names combine for over a quarter of the fund's weight.
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