Understanding What's Inside Financial Sector Indices & Introducing A Big Bank Index

If you’re trading the financial sector, you’re probably familiar with gyrating big-bank related headlines. You may even like them. Bank stocks can move, up or down, on all kinds of news. Just last month big banks surged and then retreated in a span of three days with headlines like:

  • “Bank stocks (except Wells) surge amid strong results”
  • "Wall Street dips after lackluster big bank earnings

For traders, this kind of volatility can be a welcome and potentially profitable opportunity, especially if you can find a pure play on the largest, most closely followed names in the banking business. The Solactive MicroSectors U.S. Big Banks Index, may give you exactly that.

This index represents the most concentrated U.S. big bank exposure available, even compared to financial sector indices from the big name index providers. Before we fully explain our U.S. Big Banks Index, it’s important to understand what exactly is in other financial indices.

Financial Sector Index landscape: know before you trade

Most financial sector indices dilute their bank exposure by including non-bank financials. For example, the top three constituents in the S&P Banks Select Industry Index, by weight, aren’t banks: they’re in the insurance and lending businesses.

More importantly, REITs and insurers make up a large portion of many “financial sector” indices. These non-bank stocks can have a very different response to certain market and economic developments compared to bank stocks. And some “financial sector” indices even include foreign banks, which may be subject to a very different interest rate, regulatory and legislative regimes, compared to the biggest U.S. banks.

  • The Russell 1000 Financial Services Index is only 27% banks—the rest is insurance (13%), real estate (18%), diversified financial services (26%), and even software & services (15%)! Software obviously behaves very differently to bank stocks.
  • The Dow Jones U.S. Financials Index is only 29% banks—the rest is a mix of real estate (20%), insurance (14%), software & services (9%), and diversified financials. Real estate often moves in the opposite direction from banks on macro news, like interest rates.
  • The S&P Financial Select Sector Index is 42% banks—the rest is diversified financial services with an 18% weighting to Insurance Companies, which significantly dilutes the sector exposure for traders looking for a pure play on banking moves.
  • The S&P Banks Select Index claims a singular focus on “Banks” but that bank exposure includes small, mid, and large cap names, across sub-industries like asset management & custody banks, diversified banks, regional banks, other diversified financial services, and thrifts & mortgage finance. The top 3 holdings in this “banking” index are LendingTree, AXA, and Voya (as of 4/15/19).
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