Under The Hood: An Unheard of Bank ETF

Given that the financial services sector is the second-largest sector weight in the S&P 500 and often the industry group most ensconced in controversy, it can be hard to imagine an ETF that tracks bank stocks leading an anonymous existence.

In a year when Financial Select Sector SPDR (NYSEARCA:XLF), the Vanguard Financials (NYSEARCA:VFH) and the iShares Dow Jones US Financial (NYSEARCA:IYF) have produced average returns of almost 24 percent, believing in a bank ETF’s anonymity might seem even harder. Well, believe it or not, there are some bank funds that toil in obscurity and some produced excellent returns in 2012.

Take the iShares MSCI ACWI ex US Financials Sect (NASDAQ:AXFN) as a prime example. This is a fund that ETF critics would love to hate for two reasons. First, average daily volume of just 1,440 shares is sure to scare plenty of folks off. Second, making the volume issue seem all the more off-putting is the fact that the iShares MSCI ACWI ex US Financials Sector Index Fund does not get around to trading everyday.

Third, the fund is almost three years old and has just $1.15 million in assets under management. However, AXFN stands as a prime example of a small ETF that has delivered big returns in 2012.

Without the benefits of high-flying U.S. bank names such as Bank of America Corp (NYSE:BAC) and Citigroup Inc. (NYSE:C), AXFN has surged 26.1 percent. In fact, AXFN’s 2012 performance is arguably more impressive than those of its peers because this ETF does a better job of spreading its weight around.

AXFN is home to 264 stocks and HSBC Holdings plc (NYSE:HBC), the ETF’s largest holding, receives a weight of just 4.5 percent. The fund’s top-10 holdings represent just 21.4 percent of AXFN’s total weight. By comparison, XLF is home to 83 stocks and its top-10 holdings account for over half that ETF’s weight. Wells Fargo & Company (NYSE:WFC) alone receives an allocation of almost 8.5 percent. IYF’s top-10 holdings account for almost 40 percent of that ETF’s weight with Wells Fargo leading the way with an allocation of 6.4 percent.