A smart beta exchange traded fund, the Invesco KBW High Dividend Yield Financial ETF (KBWD) debuted on 12/02/2010, and offers broad exposure to the Financials ETFs category of the market.

What Are Smart Beta ETFs?

For a long time now, the ETF industry has been flooded with products based on market capitalization weighted indexes, which are designed to represent the broader market or a particular market segment.

Because market cap weighted indexes provide a low-cost, convenient, and transparent way of replicating market returns, they work well for investors who believe in market efficiency.

There are some investors, though, who think it's possible to beat the market with great stock selection; this group likely invests in another class of funds known as smart beta, which track non-cap weighted strategies.

This kind of index follows this same mindset, as it attempts to pick stocks that have better chances of risk-return performance; non-cap weighted strategies base selection on certain fundamental characteristics, or a mix of such characteristics.

Methodologies like equal-weighting, one of the simplest options out there, fundamental weighting, and volatility/momentum based weighting are all choices offered to investors in this space, but not all of them can deliver superior returns.

Fund Sponsor & Index

Managed by Invesco, KBWD has amassed assets over $373.16 million, making it one of the average sized ETFs in the Financials ETFs. Before fees and expenses, KBWD seeks to match the performance of the KBW Nasdaq Financial Sector Dividend Yield Index.

The KBW Nasdaq Financial Sector Dividend Yield Index is a dividend yield weighted index seeking to reflect the performance of approximately 24 to 40 publicly listed financial companies engaged in the business of providing financial services and products, including banking, insurance and diversified financial services, in the US.

Cost & Other Expenses

Investors should also pay attention to an ETF's expense ratio. Lower cost products will produce better results than those with a higher cost, assuming all other metrics remain the same.

Annual operating expenses for KBWD are 2.02%, which makes it one of the most expensive products in the space.

It has a 12-month trailing dividend yield of 10.86%.

Sector Exposure and Top Holdings

Even though ETFs offer diversified exposure that minimizes single stock risk, investors should also look at the actual holdings inside the fund. Luckily, most ETFs are very transparent products that disclose their holdings on a daily basis.

This ETF has heaviest allocation in the Financials sector - about 100% of the portfolio.

Looking at individual holdings, Ellington Financial Inc (EFC) accounts for about 3.90% of total assets, followed by Agnc Investment Corp (AGNC) and Fs Kkr Capital Corp (FSK).

The top 10 holdings account for about 34.69% of total assets under management.

Performance and Risk

Year-to-date, the Invesco KBW High Dividend Yield Financial ETF has lost about -0.03% so far, and is up about 8.70% over the last 12 months (as of 06/24/2024). KBWD has traded between $13.12 and $16.67 in this past 52-week period.

The ETF has a beta of 1.43 and standard deviation of 20.88% for the trailing three-year period, making it a medium risk choice in the space. With about 42 holdings, it has more concentrated exposure than peers.

Alternatives

Invesco KBW High Dividend Yield Financial ETF is a reasonable option for investors seeking to outperform the Financials ETFs segment of the market. However, there are other ETFs in the space which investors could consider.

Vanguard Financials ETF (VFH) tracks MSCI US Investable Market Financials 25/50 Index and the Financial Select Sector SPDR ETF (XLF) tracks Financial Select Sector Index. Vanguard Financials ETF has $9.17 billion in assets, Financial Select Sector SPDR ETF has $38.50 billion. VFH has an expense ratio of 0.10% and XLF charges 0.09%.

Investors looking for cheaper and lower-risk options should consider traditional market cap weighted ETFs that aim to match the returns of the Financials ETFs.

Bottom Line

To learn more about this product and other ETFs, screen for products that match your investment objectives and read articles on latest developments in the ETF investing universe, please visit Zacks ETF Center.

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Invesco KBW High Dividend Yield Financial ETF (KBWD): ETF Research Reports

AGNC Investment Corp. (AGNC) : Free Stock Analysis Report

Ellington Financial Inc. (EFC) : Free Stock Analysis Report

Financial Select Sector SPDR ETF (XLF): ETF Research Reports

Vanguard Financials ETF (VFH): ETF Research Reports

FS KKR Capital Corp. (FSK) : Free Stock Analysis Report

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