Is It Time To Get Back Into Financial ETFs?

For more than a year now, the financial sector has taken a beating and financial exchange traded funds  have since been bruised and battered.

However, such stocks as Wachovia Corp. (WB) have been selling at 51% of book value for the past few weeks. Many investors may begin to salivate at these numbers, but although financial stocks look cheap, it may be too early to bank on them.

Jason Zweig for the Wall Street Journal looks at certain theories of Benjamin Graham, which would encourage investors to hold out on investing during the current market environment. He quotes Graham as saying, “An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”

As an investor, it is emphasized to distinguish between a sound investment and speculation before money is put toward any financial instrument.

By safety of principal, Graham means protection against loss under normal or reasonably likely market conditions. In our current economic state, one cannot pretend to be protected against loss while real estate is still crumbling, being that it is the foundation for most financial stocks.

When evaluating whether or not to jump back into financials, a look at how financial institutions are investing may answer the question as to whether or not it is time to get back on board. The heads of financial companies lack the confidence and/or cash to buy their own shares. When these banks and institutions don’t know what their own assets are worth, there really isn’t any way for outsiders to value a stock without speculation. If the heads of financial companies won’t buy, why should you?

Although it might not be the right time to ride the financials wave quite yet, this sector will have the greatest turnaround once the market rights itself. Up until the market corrects itself, it is essential not to over-speculate. It is a much better strategy to wait until positive trends are evident rather than predicting turnarounds. Use the 200-day moving average to spot trends, and save yourself from potential losses that often come from trying to make predictions.

Some ETFs that may be affected by a turnaround include:

• iShares Dow Jones US Financial Sector (IYF), down 21.4% year-to-date
• Vanguard Financials ETF (VFH), down 21.1% year-to-date
• Financial Select Sector SPDR (XLF), down 23.3% year-to-date

Comments

[Jimmy Lathrop:]

Two of your recently posted articles seem to contradict each other. One article suggests the time to buy financials ETF is now, and another article suggests that the NY AG's prosecution of Citigroup will hurt financial ETFs. There is nothing wrong with changing your opinion, but usually it takes a matter of days. Going shoe shopping with you must be hellish. :-)

2008 Aug 02 12:00 AM

[ETF STER:]

It seems that every week, someone writes "Time to invest in financial stocks again". The next week another huge loss is posted by another financial company.

I would not recommend investing anytime soon in financial ETF's, stocks, or mutual funds until the dilution and losses that are still washing through the system are over.

IMHO, the losses are not over yet, beware of false rallies.

2008 Aug 02 09:37 AM

[LiquidSoapD...:]

Jimmy. did you actually read both articles, or just the titles?

Either you or I must be taking crazy pills, because I see no contradictions between the authors articles -- neither advises putting money in financials at this time.

2008 Aug 02 09:44 AM

[LiquidSoapD...:]

ETF STER too??? You guys really bother to post comments based solely on the titles? READ THE ARTICLE! You guys look foolish.

2008 Aug 02 09:47 AM

[Jimmy Lathrop:]

LiquidSoapDispenser - My original comment was edited by someone at SA. I don't even know if this would be posted. All you need to know is that if you knew me personally I would never, EVER use an emoticon. I have a feeling Tom Lydon and his vague articles have exerted an undue influence on the editors on this site.

2008 Aug 02 11:06 AM

[Jimmy Lathrop:]

What's even more galling is that the editors will allow IShortYou to write the same comment under every article and then have the temerity to mess with my comments. If you don't like what I have to say, then have the guts to tell me so, or just delete my comment. BUT DON'T RE-WRITE MY COMMENTS UNDER MY NAME AND LEAVE AN EMOTICON OR I WILL SUE.

2008 Aug 02 11:08 AM

[Jimmy Lathrop:]

Okay, I've taken the long walk around the block and calmed down. I am not suing anyone. I am sorry I offended anyone.

The editing of my comments means that the board at SA would like to phrase my contributions in what they feel to be a positive light instead of a negative one. I will look at their actions as a compliment and for that I thank them very much.

The only request that I have is that if they continue to edit my comments for content, that they take one step forward and edit for grammar and typographical edits because I often leave stray keystrokes in my comments and see them after posting and it drives me nuts. I mean, you guys are in the body of my message anyway deleting things, take out that extra letter which snuck itself into the comment, okay? [ insert emoticon ]

2008 Aug 02 11:29 AM

[titanic:]

Why would anyone buy bank stocks whose balance sheets are loaded with junk; at least enough junk to reduce the equity value of the shares to zero. Maybe it is better to buy the bonds and at least get interest until the banks get pulled through the knothole of bankruptcy and then you get shares as part of the reorganization. This mess is less than halfway and the economy is still tanking and that tanking will pick up steam. Bernanke doesn't have to worry too much about inflation because most people don't have any discretionary money to spend on "core" items. One thing that would help get this over would be a repeal of the Bankruptcy Reform Act so the irresponsible lenders can go down in tandem with the irresponsible borrowers. At least it would wash the slate clean and would be better than this slow bleed out.

2008 Aug 05 12:42 AM

[MorseMan:]

Does no one think this is a good deal? Does no one have a long timeline? Financials have been taking a beating for a full year and are down 30% from a year ago. Do you doubt they will eventually reach their previous position and exceed it? Buy whenever you want; chances are you'll be up 43% (inverse of "down 30%") after two years. Sounds good to me.

2008 Aug 05 05:20 PM

[Financial Pawn:]

My thoughts exactly (Morseman). I'm not going to get greedy and try for the absolute bottom (that's how people get burned). The market is down.. why not buy for the long term?

2008 Aug 13 03:22 PM