ETF Talk: Mortgage Finance Fund Outperforms

Doug Fabian

Doug Fabian is known for his expert knowledge of ETFs, bear funds and enhanced index funds to profit in any market climate.

The mortgage market and homebuilding industries have been two of the top-performing sectors in 2012 and their recovery from the bottom of the ’08 real estate crisis appears to be gaining momentum. An exchange-traded fund (ETF) that lets you invest in both of these sectors is the SPDR S&P Mortgage Finance ETF (KME).

The fund seeks investment results that closely correspond to the price and yield performance, before fees and expenses, of the S&P Mortgage Finance Select Industry Index. That index features the mortgage banking, processing and marketing segments of the U.S. financial services industry. To understand the components of the fund, it is useful to know what the index is designed to track.

To that end, the performance of the index is reflecting a strong recovery in the sector. While mortgage rates are at record lows, lending has tightened due to uncertainty about the economy. Despite this heightened aversion to risk among mortgage lenders, KME is up 32.43% year-to-date.

One reason for this surge is the inclusion of homebuilders in the ETF. Homebuilding has improved this year, with existing-home sales, new residential construction and building permit authorizations beating market expectations. These positive signs point to growth and new business for mortgage finance companies.

The sector allocation is worth noting. The index’s name gives the impression that the primary businesses it tracks consist of mortgage industry-related companies. But a closer look at the composition of the holdings reveals that 58.77% of the ETF includes property and casualty insurance companies. Other major holdings of the fund are homebuilders, 22.52%, and thrifts and mortgage finance companies, consisting of 18.71%.

KME is a well-diversified fund that consists of 45 holdings, each consisting of less than 4% of the portfolio. The five biggest holdings are: Ocwen Financial Corp, 3.73%; Fidelity National Financial, 3.48%; Old Republic Intl. Corp, 3.16%; Arch Capital Group Ltd, 3.12%; and Ryland Group Inc., 3.11%.

Recent indications are that the mortgage and homebuilding markets will keep moving toward full recovery in the next five years. While policy implications in Washington have tightened lending standards, a resolution in the near future should clear up some uncertainty and give another boost to KME.

If you want my advice about buying and selling specific ETFs, including appropriate stop losses, please consider subscribing to my Successful Investing newsletter. As always, I am happy to answer your questions about ETFs, so do not hesitate to email me by clicking here. You may see your question answered in a future ETF Talk.

share on:
share on:


Dr. Mark Skousen

Named one of the "Top 20 Living Economists," Dr. Skousen is a professional economist, investment expert, university professor, and author of more than 25 books.

Product Details

  • Forecasts & Strategies
  • Home Run Trader
  • Fast Money Alert
  • Five Star Trader
  • TNT Trader

Bryan Perry

A former Wall Street financial advisor with three decades' experience, Bryan Perry focuses his efforts on high-yield income investing and quick-hitting options plays.

Product Details

  • Cash Machine
  • Premium Income PRO (exclusively for subscribers of Cash Machine)
  • Quick Income Trader
  • Breakout Options Alert
  • Hi-Tech Trader

Jim Woods

Jim Woods has over 20 years of experience in the markets from working as a stockbroker,
financial journalist, and money manager. As well as a book author and regular contributor to
numerous investment websites, Jim is the editor of:

Product Details

  • Successful Investing
  • High Velocity Options
  • Intelligence Report
  • Bullseye Stock Trader
  • Eagle Eye Opener

Bob Carlson

Bob Carlson provides independent, objective research covering all the financial issues of retirement and retirement planning. In addition, Bob serves as Chairman of the Board of Trustees of the Fairfax County (VA) Employees’ Retirement System, which has over $2.8 billion in assets.

Product Details

  • Retirement Watch
  • Retirement Watch Spotlight Series
  • Lifetime Retirement Protection Program

Jon Johnson

Jon Johnson's philosophy in investing and trading is to take what the market gives you regardless if that is to the upside or downside. For the past 21 years, Jon has helped thousands of clients gain success in the financial markets through his newsletters and education services:

Product Details

  • Investment House Daily
  • Stock of the Week
  • Technical Traders Alert
  • Rapid Profits Stock Trader

Used by financial advisors and individual investors all over the world, is the premier provider and one-stop shop for dividend information and research.

Product Details

Popular tools include our proprietary Dividend Calendar, Dividend Calculator, Dividend Score Card, and many more.

  • Dividend Investor