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 Services Select Sector SPDR (NYSE:XLF), the Vanguard Financials ETF (NYSE:VFH) and the iShares Dow Jones U.S. Financial Sector Index Fund (NYSE: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 Sector Index Fund (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 (NYSE:BAC) and Citigroup (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 (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 (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.

Additionally, AXFN has not rallied solely on the back of the most controversial international banking names. Yes, HSBC and Spain's Banco Santander (NYSE:SAN), are top-10 holdings, but so are three Canadian banks. Canadian banks have long been viewed as steadier, more conservative alternatives to their U.S. peers.

Australian banks, a group that is also further down the controversy totem pole than U.S. and European equivalents, account for 11.1 percent of AXFN's weight.

In terms of liquidity, AXFN is not as off-putting as some might think. Yes, the ETF's average daily volume is paltry, but what is more important than an ETF's overall liquidity is the volume of its underlying holdings. Of the five of ACWN's top-10 holdings that trade in the U.S., the one with lowest average daily volume is Bank of Nova Scotia (NYSE:BNS) with average daily turnover of almost 383,000 shares.

AXFN also features an almost seven percent weight to Chinese banks, many of the same that are found in the iShares FTSE China 25 Index Fund (NYSE:FXI), an ETF that has never been assailed for lack of liquidity. Additionally, nearly all of AXFN's holdings that do not trade in the U.S. are heavily traded in their home markets, so investors are not getting involved with a slew of obscure, thinly traded names with this fund.

The bottom line with AXFN is two-fold. First, the slack volume and low AUM is clearly keeping investors at bay and a derivative of that is a bid/ask spread that can often be wider than most folks will want to be involved with. However, and this is the second point, if bank stocks offer a 2012 sequel in 2013, AXFN could easily be a bank ETF leader. It is just a matter of how many investors actually realize it.

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