ex-financials

If there is a single buzzword that’s taken up ubiquitous residence in the most fashionable quarter of ETFtown these past few years, it’s “Ex-Financials” – index products designed to give you exposure to a given geography or market but with the financial stocks left out.  The reasons are obvious, nobody wants to have exposure to banks when they know the books are being cooked with complicit government regulators looking on.  And lest you think the suspension of GAAP standards is merely a US phenomenon, you should see the kind of shit European banks are getting away with.

And Chinese banks? Forgetaboutit.

Which brings me to a new piece of research from Jeremy Schwartz of WisdomTree.  Schwartz’s shop has an ex-financials China Dividend ETF (could that be any buzzier?) and he explains that Chinese indices are still way too heavy with financials and bank stocks to be attractive in and of themselves (unless you’re bullish on Chinese real estate development loans, lol).  Financials make up a whopping 50% of some mainstream China indices, for example.  So WisdomTree created $CHXF as a way to get exposure to everything else and have a dividend orientation. We’re not using the fund here, we’re a little more old-fashioned with our EM exposure at the moment.

But the more interesting question raised here is “If I don’t like the banks of a country, why would I want to be in their stock market at all.”  Schwartz’s answer to that below is a good one, the US stock market is a perfect example of why:

If financials are likely to be weak, why bother investing in a given market? An initial reaction to any “ex-financials” equity approach might be to think that if the financial sector is weak, then the rest of the market is likely to also be weak.

In that regard, the United States, through the use of the S&P 500 Index, presents an interesting case study over the past decade. We look to this index and country mainly because of the breadth of history available—the financial crisis of 2008–09 was without question the worst since the Great Depression of the 1930s. China’s equity markets do not have such a record of performance history from which to draw. Figure 4 indicates that over the past decade, in the face of such a severe crisis, there has been a decoupling between the performance of the broader S&P 500 Index and that of the S&P 500 Financials Sector Index. While we can’t say that this will always be the case or that similar results would necessarily hold true for China’s equities, we can say that it is possible for the performance of financials can to be markedly different from that of other sectors.

  • most noteworthy is the average annual performance over the five years ended June 30, 2012, where even though the financials component was down by over 14% per year, the broader S&p 500 index was pulled up enough by the other nine sectors to generate a positive return. the other nine sectors, in an equal-weighted blend, had over 3.3% average annual returns.
  • on a 10-year basis, while the financial sector was down nearly 3% per year, the other nine sectors averaged nearly 7.75% per year.

 

Josh here – by ignoring US banks but keeping your exposure to the rest of the productive economy, you saw quite a difference in performance even despite a rocky ride for the indices overall.  Will the same be said years from now about those who kept China on and zeroed out their Chinese bank exposure?

 

 

Tags:

This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here: https://www.ritholtzwealth.com/advertising-disclaimers

Please see disclosures here.

What's been said:

Discussions found on the web
  1. Milky Way Hair Wholesale commented on Oct 13

    Milky Way Hair Wholesale

    […]below you will come across the link to some web-sites that we believe you ought to visit[…]

  2. Malaysian Hair Wholesale commented on Oct 13

    Malaysian Hair Wholesale

    […]we prefer to honor a lot of other online internet sites on the internet, even when they aren’t linked to us, by linking to them. Beneath are some webpages really worth checking out[…]

  3. Virgin Hair Wholesale commented on Oct 13

    Virgin Hair Wholesale

    […]Every when inside a even though we choose blogs that we read. Listed below would be the most up-to-date sites that we pick out […]

  4. Indian Hair Wholesale commented on Oct 13

    Indian Hair Wholesale

    […]here are some hyperlinks to web-sites that we link to due to the fact we assume they’re worth visiting[…]

  5. شرکت دوربین مدار بسته commented on Oct 14

    دوربین مداربسته

    Do you have a spam problem on this website I also am a blogger, and I was wanting to know your circumstance we have created some wonderful techniques and we are searching to swap strategies with other individuals, be sure to shoot me an e-mail if fasci…

  6. tratamiento adicciones commented on Oct 14

    tratamiento adicciones

    […]although websites we backlink to below are considerably not connected to ours, we really feel they are really worth a go by, so have a look[…]

  7. Montreal Canada commented on Oct 14

    Montreal Canada

    […]here are some hyperlinks to internet sites that we link to because we assume they may be worth visiting[…]

  8. فروش دوربین مدار بسته commented on Oct 14

    فروش دوربین مدار بسته

    Hey! I know this is considerably off topic but I was asking yourself which weblog platform are you utilizing for this internet site? I’m acquiring unwell and drained of WordPress because I’ve had difficulties with hackers and I’m looking at choices for…

  9. find a hacker commented on Oct 14

    find a hacker

    […]Every the moment inside a even though we opt for blogs that we study. Listed below would be the latest websites that we choose […]

  10. دوربین مدار بسته وای فای commented on Oct 15

    دوربین مدار بسته وایرلس

    Hey, I feel your internet site might be obtaining browser compatibility problems. When I seem at your blog in Chrome, it looks fantastic but when opening in Net Explorer, it has some overlapping. I just wished to give you a swift heads up! Other then t…

  11. بهترین دوربین دنده عقب commented on Oct 15

    دوربین دنده عقب

    Hey, I believe your internet site may well be obtaining browser compatibility concerns. When I appear at your weblog in Chrome, it seems good but when opening in Internet Explorer, it has some overlapping. I just wished to give you a quick heads up! Ot…

  12. Desert tan military boots commented on Oct 15

    Desert tan military boots

    […]we came across a cool web page that you may get pleasure from. Take a search in case you want[…]

  13. قیمت دوربین آنالوگ commented on Oct 15

    دوربین مدار بسته آنالوگ

    When I to begin with commented I clicked the “Notify me when new responses are added” checkbox and now every time a comment is extra I get three emails with the exact same remark. Is there any way you can eliminate me from that service? Thank you!

  14. clit vibrator commented on Oct 16

    clit vibrator

    […]we came across a cool web-site that you simply may love. Take a appear for those who want[…]