Can We Bank on a Financial ETF Rebound?

As banks traverse the financial gauntlet placed before them, some financial institutions are providing some uplifting signs and investors are beginning to look favorably on the downtrodden financial sector and its related ETFs.

After Citigroup (C) announced that it was making money in the first two months of the year, some other major financial institutions, like Bank of America (BAC), JPMorgan Chase (JPM) and HSBC Holdings, also broke out in a show of strength and rode the ensuing wave of optimism, reports David Gaffen for The Wall Street Journal. Bank shares are up more than 40% since last week.

Looking at the fundamentals, borrowing costs have dramatically declined with federal-fund rates being greatly cut down, which allow banks to borrow for basically nothing, and banks are able to receive funds from the Federal Reserve. Furthermore, banks are still able to lend at higher rates, and that is where their profits are coming.

Improvements are also coming through with normalized hedging strategies and wider bid-offer spreads because of a reduced number of companies facilitating trades. It is thought that ongoing deterioration in loan quality and expectations of more write-downs will impede regular banking in the future.

Wells Fargo (WFC) and a growing list of other bankers are vexed by restrictions imposed by the TARP program, which has affected lending, foreclosures, pay, and job perks, writes Ari Levy for Bloomberg. Now, some just want return the money. Wells Fargo had to reduce dividends by 85% to 5 cents a share and it made a quarterly payment of $371.5 million for interest on the $25 billion TARP investment.

The government is now going forth with a “stress test” to see which of the 19 largest U.S. banks need more capital. It is believed that the test will protect the banking system and help see that the necessary capital is provided for a more sound financial system.

Meanwhile, the regional banking sector has been side-stepping much of the tumult lately.

• SPDR Financial (XLF): up 18.9% in the last week; up 7.3% in the last month; BAC is 5.5%; JPM is 12.3%; WFC is 10.3%

• iShares Dow Jones U.S. Financial Sector Index Fund (IYF): up 16.6% in the last week; up 4.2% in the last month; BAC is 2.9%; JPM is 10%; WFC is 5.6%

• Rydex Equal Weight Financials (RYF): up 13.9% in the last week; up 0.9% in the last month

Read the disclosure, as Tom Lydon is a board member of Rydex Funds.

Max Chen contributed to this article.

Comments

[AndrewBaker:]

We've got the rebound, but how long will it last? Financials are being bought and sold on sentiment not soundness, and if fundamentals were the criteria, they would still all be being sold. Day and short term trade the financial ETF - especially the leveraged variety SKF UYG FAS and FAZ - and don't leave your screen for too long either.

Mar 23 11:48 AM

[SwingTimer:]

And the answer is.....

Mar 23 01:59 PM

[richpee:]

When you can buy an EFT like UYG for $1.37 a shares and sell it one weeklater for $3.01 it works good. FAS went from $3.50 area to over $7.00 in that same time period. Nice return ? yes!

This to me is an excellent opportunity to buy into a diverse portfolio of banks,finacial service industry at deep discounts to true value.

Look at XLF FAS IYG KBW UYG RKH beware--some of these are triple leveraged and double leveraged higher risk-higher reward but read-study them before you buy. Time the market and watch your investments. Nothing wrong with trading the trend in this volitle market either.

It's probabaly time for a retrenchment on this run up back down 7 to 8% and then we're in for a good ride, Hopefully, these financail investmetn ETF's will help you make soem back

Mar 24 04:55 PM