Financial ETF, Finance Exchange Traded Funds

By: EconomyWatch   Date: 4 August 2009

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EconomyWatch

The core Content Team our economy, industry, investing and personal finance reference articles.

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Financial exchange traded funds are ETFs that hold financial institutions stocks as their underlying assets. Their holdings include shares of banks like the Citibank or the Bank of America. Financial ETFs invest in a broad range of banking and financial stocks, paving the way for more diversification. This, however, limits the profits.

Financial ETF do not offer customizability. There are ETFs which focus on both the sub prime market along with the credit lending institutes together, something which many traders do not prefer.

More about Financial ETF

Financial ETFs cover all the financial sectors including:

  • Banks

  • Brokers firms

  • Asset management companies

  • Insurance companies

As there are a large number of financial companies in the world, financial ETFs too vary in their portfolio. They come in 4 different types:

·        Global

·        National

·        Industry specific

·        Smaller and narrower groups of different companies within a sector

Numerous combinations are available for picking up the portfolio in order to create financial ETFs. Similarly, there are many types of these ETFs that exist such as the leveraged and inverse ETFs.

 

Tips on Financial ETFs

Trading in financial ETFs can be a tricky situation as different markets behave differently in volatile periods.

Points to consider while investing in a financial ETF are:

  • Sector based financial ETFs are extremely volatile. However, they have a tendency of going up. Therefore, they can be used for rebalancing the portfolio to minimize the risk. Sector based financial ETF are good for short term trading.

  • If a trader observes that a particular sector will rise tremendously then he can invest in those ETFs that carry such sector holdings. Traders can invest in a broad portfolio and invest separately in the sector ETF for hedging the losses.

 

Advantages of Financial ETFs

The advantages of financial ETFs are:

  • They perform exceedingly well during periods when economies are booming. Their performance clearly reflects the performance of their underlying financial institutes.

  • With inverse financial ETFs, profits can be made even in the slump.

 

Disadvantages of Financial ETFs

Some disadvantages of financial ETFs are:

  • The distributed capital gains make the investor eligible for capital gain tax. This reduces the profit levels.

  • Financial ETFs, if not hedged properly, can cause more losses than the investments.

Those who plan to invest in Financial ETFs must exercise care while selecting the portfolio for hedging and diversification.


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