Four New Ways to Trade the Financial Sector

12/03/2010 12:01 am EST

Focus: ETFS

After the product development front slowed for much of October and November, the last week has seen a tremendous surge in activity as nearly two dozen new ETFs have begun trading. Continuing this impressive blitz of new products, PowerShares rolled out four new ETFs offering exposure to various corners of the financial sector on Thursday.

Each of the new ETFs will be linked to an index maintained by Keefe, Bruyette & Woods (KBW), an investment bank that maintains benchmarks to which several existing products in the Financials Equities ETFdb Category are linked. PowerShares had announced in September that is acquired the exclusive licensing rights to four KBW indexes. The new ETFs, linked to these indexes, include:

  1. KBW Premium Yield Equity REIT Portfolio (KBWY): This fund will seek to replicate the KBW Premium Yield Equity REIT Index, a dividend-weighted index consisting of between 25 and 40 small-cap and mid-cap US equity REITs. KBWY charges an expense ratio of 0.35%.

  2. KBW High Dividend Yield Financial Portfolio (KBWD): This ETF is linked to the Financial Sector Dividend Yield Index, another dividend-weighted benchmark consisting of between 25 and 40 securities. The underlying holdings will be financial companies that are principally engaged in the business of providing financial services and products, including banking, insurance and diversified financial services, in the US KBWD charges an expense ratio of 0.35%.

  3. KBW International Financial Portfolio (KBWX): This fund will reflect the KBW Global ex-US Financial Sector Index, a benchmark made up of ADRs of about 60 non-US financial companies. Index components may be engaged in a variety of activities related to the financial sector, including banking and insurance. KBWX charges an expense ratio of 0.40%.

  4. KBW Property & Casualty Insurance Portfolio (KBWP): Linked to the KBW Property & Casualty Index, this ETF will invest in stocks of property and casualty insurance companies. KBWP charges an expense ratio of 0.35%.

The two dividend-weighted products, KBWY and KBWD, will offer another option for generating yield through equity exposure. With interest rates hovering around record lows, many investors have turned to dividend-paying stocks as a means of enhancing the overall current return of their portfolios.

KBWX will offer exposure to ex-US financial companies, making it a potentially interesting component of a variety of market-neutral plays (e.g., long US financials/short ex-US financials). KBWP offers another way to gain exposure to insurance companies, joining the iShares Dow Jones US Insurance Index Fund (IAK) and SPDR KBW Insurance ETF (KIE).

PowerShares also offers a more broad-based insurance ETF; the Dynamic Insurance Portfolio (PIC) invests in companies engaged in underwriting and distributing life, health, and property/casualty insurance policies.

By Michael Johnston of

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