Owning Bank of America may be too much even for those brave enough to own U.S. financials. Lucky for them, a few bank ETFs avoid B of A.
I wouldn’t be caught dead owning Bank of America. It’s one costly settlement after another for the once mighty company. This time the tab comes in at $335 billion in connection with subprime loans made by its Countrywide unit to borrowers who qualified for lower-rate prime loans.
Should this and Fitch’s recent downgrade of the bank drive the stock’s price below $5 -- the minimum acceptable share price for many of the nation’s largest pension funds -- downward momentum could intensify.
Even beyond Bank of America, I can’t even get my head around why someone would want exposure to this segment. But I shouldn’t mock what could turn out to be a profitable contrarian idea. Moreover, it can be done, as I said, Bank of America-free, using ETFs.
But first the bad news that validates my sense that BAC stinks to high heaven.
In the year-to-date total return chart below, notice the nearly 24 percent decline of RWW, the RevenueShares Financials ETF (NYSEArca: RWW). The revenue- weighted offering gives investors the most concentrated exposure to the bank – 8.2 percent -- an unpleasant distinction if ever there was one.
What’s more, all but two of the funds in the chart have had terrible years in 2011.
The good news for these investors is they do have options.
Of the 10 funds in the US Financial segment as determined by our ETF Finder, four have no exposure to Bank of America, and their differences are significant. They also happen to be the segment's four best performing funds YTD.
FXO, the First Trust Financials AlphaDEX ETF (NYSEArca: FXO and PFI, the PowerShares Dynamic Financial Portfolio (NYSEArca: PFI), both have proprietary methodologies to weight and select companies for inclusion. They use a range of growth and value metrics to determine which banks are poised to outperform.
The problem with these funds is that BAC's valuation could, in the future, trigger these indexes to include the company in future rebalances. So, while investors are safe from the bank's problems for now, they're not guaranteed to be in the future.
PSCF, the PowerShares S&P SmallCap Financials Portfolio (NYSEArca: PSCF), on the other hand, targets only small-cap financials. As such, it not only has no BAC exposure, there is unlikely to be any in the future unless B of A really hits the skids and downsizes in a big way.
I'd venture to guess that Bank of America is more likely to go belly up or be swallowed up by one of the nation's other leading banks before that happens.
The other option is KBWD, the PowerShares KBW High Dividend Yield Financial Portfolio (NYSEArca: KBWD). Its index weights companies by dividend yield, and is unlikely to include BAC at any time in the foreseeable future, unless the bank starts borrowing money to pay a dividend.
These portfolios are not without their own risks, but, hey, if you're interested in financials, you're likely more in tune with those risks than I.
Investors looking abroad will find little shelter. For starters, the only global financial ETF, the S&P Global Financials Sector Index Fund (NYSEArca: IXG), has 1.36 percent of its portfolio in BAC. Add that to the fact it also holds a number of European banks hard-hit by the European sovereign debt crisis and suddenly the word looks very flat.
In the end investors scared off by the vast sea of headline risk facing BAC, can get U.S. financials exposure while insulating themselves from the problems facing these firms.
But that still leaves me thinking: What are these investors thinking?