The Financial Select Sector SPDR Fund (NYSE:XLF) is down 5.6 percent year to date, which is one of the worst performances among the sector SPDR exchange-traded funds and one that serves as a reminder of the weakness in U.S. bank stocks.
European financial services names have not been anything to brag about either, as the iShares MSCI Europe Fincls Sctr Indx Fd (NASDAQ:EUFN) has been about 200 basis points worse than XLF. With woes for some of Germany's big banks to a borderline banking crisis in Italy, the eurozone's third-largest economy, it is not surprising the region's financial services stocks are struggling.
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Looking To The Eurozone With Minimal Exposure To Banking
Nor is it surprising that some investors would like to maintain exposure to eurozone equities without too much of that exposure going to bank stocks. The WisdomTree Inter Hedged Eq Fund (NYSE:HEDJ), 2015's top asset-gathering ETF, can help with that objective.
Although some new reforms and regulations are seen as steps in the right direction for the eurozone's fractured banking systems, the time it takes for investors to realize the rewards of such efforts can be trying on their patience.
Therefore, during times of market stress, the worst is assumed until rumors can be thoroughly disproven. To start 2016, new 'bail-in' provisions have been put into effect in the eurozone. Under these measures, private sector creditors will be forced to absorb losses during bank failures before government funds are made available.
While these policies may serve as an important step in limiting 'too big to fail,' some questions remain about their operations during periods of crisis, said WisdomTree in a recent note.
Allocations And Holdings
HEDJ allocates 10.1 percent of its weight to financial services stocks, putting that sector in a tie with healthcare as the ETF's fourth-largest sector weight. However, that 10.1 percent is easily outpaced by the 18.6 percent the ETF devotes to consumer discretionary names, its third-largest sector allocation.
HEDJ's top 10 holdings feature two Spanish bank stocks, but, fortunately, the ETF's overall Italy allocation is light at less than 2 percent. Additionally, big-name German and French bank costs, many of which have recently experienced boosts to their borrowing costs, play minimal parts in determining HEDJ's fate.
Complicating matters further, these concerns are not limited to small, regional players on the periphery. Given the propensity for large banks to originate loans across the monetary union (often at higher rates), mega-cap financials like Deutsche Bank, UniCredit and BNP Paribas have seen borrowing costs climb as equity markets fell in recent weeks. While regulators appear confident in public that the recovery remains on track, the uncertainty is clearly causing some investors to derisk their portfolios and ask questions later, added WisdomTree.
Consumer staples and industrials combine for over 41 percent of HEDJ's weight.
Disclosure: Todd Shriber owns shares of XLF.
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