Financial ETFs Wait for Washington's Reforms

Includes: IXG, IYF, VFH, XLF
by: Tom Lydon

The Senate passed its version of the financial regulatory reform bill on May 20. Since then, analysts and investors have been trying to gauge the eventual impact on the sector and its exchange traded funds (ETFs).

The Senate’s version of the legislation creates a process for liquidating financial institutions that become too big to fail, adds restrictions to derivative and proprietary trading desks in U.S. banks, creates an agency that has the power to ban lending that the Fed considers abusive, and requires borrowers to show proof that they can pay mortgage loans, Gary Smith for iStock Analyst reports. The bill passed by the Senate will require rating agencies to register with the Securities and Exchange Commission (SEC).

The United States isn’t the only country trying to push through reforms of its financial system.

Britain will make major changes to a financial regulation system that “failed spectacularly” to halt the financial crisis. David Stringer for USA Today reports that Britain’s central bank will add oversight of individual institutions to its current task in guarding against systemic risks to the financial sector.

Many have long complained that the complexity of Britain’s three-point banking system has made decision-making a nearly impossible process. It needs to be clear-cut about who is making the decisions and the guidelines that everyone is following.

This isn’t over by a long shot. The Senate bill and the House bill now need to come to some sort of consensus – the two have several differences. Until that time, we’re left to speculate on the impact of any regulation. On one end of the spectrum are those who believe that the proposed bills will go through so many revisions that the end result will be something resembling the status quo. On the other side are those who believe that these regulations will only make us less competitive in the global financial markets. Without seeing a final bill, it’s hard to say, although the truth may be somewhere in the middle.

Which side do you fall on?

Financial ETFs remain mixed; some of the ones that track the big banks are below their long-term trend lines while regional bank funds have held up fairly well. See which ones are above or below their trend lines by using our all-new ETF Analyzer.

  • iShares Dow Jones U.S. Financial Sector Index Fund (NYSEArca: IYF)
  • Financial Select Sector SPDR Fund (NYSEArca: XLF)
  • Vanguard Financials ETF (NYSEArca: VFH)
  • WisdomTree International Financial Sector Fund (NYSEArca: DRF)
  • iShares S&P Global Financials Sector Index Fund (NYSEArca: IXG)

Tisha Guerrero contributed to this article.