Market Overview

This Bank ETF Comes Of Age

This Bank ETF Comes Of Age

Amid speculation about higher interest rates and the Trump administration's tax reform effort becoming a reality, investors are bidding the financial services sector higher. When it comes to exchange traded funds tracking the S&P 500's second-largest sector weight, investors are predictably renewing their enthusiasm for plain vanilla cap-weighted funds.

Other investment styles are benefiting, too. That includes the First Trust Nasdaq Bank ETF (NASDAQ: FTXO). After jumping more than 2 percent Monday to hit another record high, FTXO is up more than 16 percent year-to-date.

Overall, FTXO has been a success in just 15 months on the market. The ETF is home to nearly $1.2 billion in assets under management, though much of that can be attributed to the fund's perch as the top holding in a popular ETF of ETFs strategy: First Trust Dorsey Wright Focus 5 ETF (NASDAQ: FV).

Doing Things Differently

First Trust has long been a dominant purveyor of smart beta industry and sector ETFs, a tradition that extends to FTXO. The ETF tracks the factor-weighted Nasdaq US Smart Banks Index. FTXO's holdings are selected based on value, volatility and growth (three-, six-, nine- and 12-month average price appreciation), according to First Trust.

Value stocks are lagging the broader market this year, in part explaining why FTXO is trailing the S&P 500. Additionally, the ETF has been significantly more volatile than the broader market and rival cap-weighted financial services funds.

Critics often assert that smart beta strategies outperform as a result of the size or value factors. FTXO's 30 holdings have a median market value of $14.9 billion, putting the ETF at the lower end of the large-cap spectrum. Although the ETF is factor-weighted, its largest holdings are familiar in cap-weighted financial services and regional bank ETFs. Those names include JPMorgan Chase & Co. (NYSE: JPM), PNC Financial Services Group Inc. (NYSE: PNC) and Citigroup Inc. (NYSE: C).

A Value Idea

As has been widely noted this year, the financial services sector is perhaps the only sector in the U.S. that is attractively valued in what is an increasingly old bull market. That explains why the sector is usually the largest or second-largest sector weight in value funds.

Indeed, FTXO reflects the value opportunity with financials with a price-to-book ratio of 1.4 and a price-to-earnings ratio of 16.4, both discounts to the S&P 500.

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