ETF Showdown: International Banking Battle

Unless one has resided under a rock or in a cave for the past three or four years, one knows that U.S. bank stocks have seen better days. European financials have faced and continue to face myriad problems, similar and exclusive to those endured by their U.S. brethren, so where do investors turn in the hunt for exposure to financial services names? Normally, a global view would be useful, but these days, it's tricky finding steady alpha among bank stocks, regardless of their domicile. For those that must walk this minefield, there are a couple of interesting and unheralded ETF options: The iShares S&P Global Financials Sector Index Fund IXG and the newly coined EGShares Financials GEMS ETF FGEM, the contenders in this week's ETF Showdown. Don't be fooled by IXG. Home to almost 220 stocks and nearly $241 million in assets under management, this “global” ETF counts JPMorgan Chase JPM, Wells Fargo WFC, Berkshire Hathaway BRK and Citigroup C among its top-10 holdings. In fact, the U.S. accounts for over 36% of IXG's country weight, nearly quadruple the allocation devoted to the U.K., the next largest country weight. On the other hand, FGEM goes in a different direction as it is entirely comprised of emerging markets financials. China, Brazil, India and South Africa combine for nearly 80% of the new ETF's weight and you'll pay up for the privilege of emerging markets exposure as FGEM has an expense ratio of 0.85% compared to 0.48% for IXG. Our quibble with FGEM isn't the fees. It's Brazil. Banco Bradesco BBD and Itau Unibanco ITUB are the ETF's two largest holdings and, overall, Brazil accounts for nearly 17% of FGEM's weight. That's bad news as Brazilian stocks entered bear market territory earlier this week. Not to mention Chinese financials face no shortage of their own problems, including bad loans and tighter regulatory requirements, making it hard to embrace FGEM at this juncture. IXG is no peach either. The ETF is home to an ugly chart, which an indicates a drop of another $2 from where it currently trades would put the ETF in a tailspin. If you can't think of a reason to buy U.S. bank stocks, then there is no reason to own this ETF. Perhaps the best thing that can be said of either ETF is that FGEM has emerging markets potential and if EM ETFs rally in the latter part of 2011, the tide may lift FGEM, but that doesn't mean FGEM is a buy right now. IXG isn't either and we have a rare draw in the ETF Showdown. There are no winners here except for the investors that avoid these ETFs in the near-term.