The Financials sector ranks last out of the ten sectors in my Sector Rankings for ETFs and Mutual Funds Report. The funds in this sector consistently hold poor stocks and charge investors high fees.
A big part of the reason for this problem is that there are just not many good stocks in the Financials sector. Only 5% of Financials stocks by market cap earn an Attractive-or-better rating. Dangerous-or-worse rated stocks make up 81% of the value in the sector. Figure 1 shows the breakdown of Financials sector stocks, ETFs, and mutual funds.
Figure 1: Financials Sector Landscape For ETFs, Mutual Funds & Stocks
Sources: New Constructs, LLC and company filings
A quick look at Figure 1 reveals that the problem in this sector goes beyond the slim pickings for quality stocks. Over 78% of Financials mutual funds earn a Very Dangerous rating, despite the fact that only 18%
The Financials sector ranks last out of the ten sectors as detailed in my Sector Rankings for ETFs and Mutual Funds report. It gets my Dangerous rating, which is based on aggregation of ratings of 43 ETFs and 232 mutual funds in the Financials sector as of April 24, 2013. Prior reports on the best & worst ETFs and mutual funds in every sector and style are here.
Figures 1 and 2 show the five best and worst-rated ETFs and mutual funds in the sector. Not all Financial sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 21 to 523), which creates drastically different investment implications and ratings. The best ETFs and mutual funds allocate more value to Attractive-or-better-rated stocks than the worst ETFs and mutual funds, which allocate too much value to Neutral-or-worse-rated stocks.
To identify the best and
Property Casualty insurance and reinsurance (which I collectively refer to as (re)insurance) is an interesting sector for investors, in that performance can be highly diversifying within an equity portfolio. Valuations are currently low, with the sector trading at close to book value, and growth prospects are strong. However the sector is quite unique, and there is some complexity behind the business model that investors need to understand to make informed decisions.
Diversification stems from two areas:
Firstly, one of the key risks insurers run is that they insure large natural catastrophes, events that happen randomly and with little stock market correlation.
Secondly, insurers have large balance sheets with long-term policyholder liabilities, and they hold assets to balance their liabilities - often in bonds, a further diversification to an equity portfolio.
These two areas also reflect the two ways that insurers create value for their shareholders :