REITs Drag On Broad Financials

October 02, 2014

Despite financials showing strength as of late, financial ex-REITs could be even stronger.

This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today's article is by Clayton Fresk, CFA, portfolio management analyst at Georgia-based Stadion Money Management.

Since the beginning of August, the financial sector has been one of the strongest performers in the U.S. However, looking a bit deeper, there has been a decent amount of divergence between the underlying industry exposures. In the following, I’ll explore this recent market action.

To start, here’s a breakdown of the underlying GICS industry group exposure for three popular broad financial ETFs:

Index Provider S&P Dow Jones MSCI
Banks* 37.6% 37.9% 35.4%
Diversified Financials 31.9% 26.4% 25.6%
Insurance 17.3% 17.3% 17.7%
Real Estate 13.2% 18.4% 21.3%

*Includes software (Mastercard/Visa) for IYF

While the bank and insurance exposure between the three names is very similar, there is some divergence when it comes to the REIT exposure, with an 8 percentage point difference between VFH and XLF, as the table above shows.

Looking at recent performance (since the recent low of Aug. 7), it’s evident that the real-estate-sector performance has lagged the other industry groups within the financial sector:

Total Return
Banks 7.32% 5.98% 6.37%
Diversified Financials 6.92% 6.81% 6.49%
Insurance 5.02% 4.59% 4.47%
Real Estate -1.15% -1.81% -1.75%

So, while the other industry groups have returned 6-8 percent since Aug. 7, REITs have negative performance. The following table is the contribution of each industry to the return of the respective ETF:




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