The Financial ETF You Wish You Owned

XLF, is the Kleenex‐ like ticker of financial ETFs. Want quick exposure to a basket of financials? XLF. Largest financial ETF? XLF. Need a chart to show representing financial stocks? XLF. Most advertised financial ETF? XLF, XLF, XLF.

The contrarian in me thought it would be interesting to take a look at the reverse of XLF — a significantly lessor known broad based financial ETF — to see how the two stacked up. What I’ve found will make many wish they’d never heard of XLF.

According to the Exchange‐ Traded Funds Report (ETFR), there are 15 US focused financial ETFs with assets over $75 million. Some of the these ETFs are focused on sub sectors in the financial sector (preferreds and regional banking for example) and others are broad based. The smallest broad based financial ETF in this group is the First Trust Financials AlphaDex ETF, ticker FXO. The largest, of course, is the infamous Financial Select Sector SPDR ETF, ticker XLF. Let the battle begin. Cue the charts!

As you can see from this chart, year to date FXO is producing on its “alpha” moniker versus XLF. Ok great, but that’s only nine months! What’s the comparison like going back further and including the financial stock collapse. The furthest we can go back is to early May of 2007 when FXO was launched, as it is a newer offering than XLF. Here’s the chart…

Although both ETFs are in the red, there is certainly a big difference between the two! If you own FXO, stop drooling on your keyboard please.

The beauty emerging in today’s ETF landscape is the amount of investment strategies being offered, often in the same area of the market, with real world performance. This should give the discerning ETF investor an edge. So while most investors will still gravitate to XLF in order to save money (lower expense ratio), experience more volume (perceived liquidity) and to basically follow the herd, other investors will do the research and discover the outperformance of FXO. In fact over $125 million has done so since FXO’s inception, making it a profitable product for First Trust.

One wonders when gazing upward at the $6 billion XLF and its proportional ad budget, what FXO could grow to if it was given equal billing. Perhaps First Trust should find out…