Tuesday, July 22, 2008

Bank ETFs

There was another run up in financial stocks today even as more financial stocks missed earnings estimates. Wachovia Bank (WB) missed earnings by a wide margin, and said it was going to cut its dividend again. The market responded by driving WB up by more then 25% and with large gains in other financial stocks. I thought that I would take a look at some financial sector ETFs to review options to play a rebound in the financial sector through ETFs. Here are some of the options that I found.

Data from Morningstar and Yahoo Finance

There are a couple of ETFs that I would like to highlight. First VFH, this looks interesting because it has the lowest expense ratio as well as the largest number of holdings. I think that it is important to look for an ETF with many holdings because there are probably still some financial stocks with problems out there and some that may still go under. If you have an ETF with a large number of holdings then if a small number of financial stocks run into problems it will not have an out-sized affect on the portfolio and you will still be able to capitalize on the rebound in financial stocks if and when it happens. Second KBE, this concentrated portfolio looks interesting if you are not worried about potential financial landmines that may still be out there. KBE has the highest dividend yield at 6.2% as well as the largest losses for both YTD and 1Yr returns. This could give it the potential for the largest rebound and it pays you to stick around while you are waiting for that rebound.

Please remember financial stocks have been very volatile and that investing in any of these ETFs is a risky strategy. Also remember that you probably have exposure to the financial sector if you hold mutual funds or other ETFs that invest in the broad market so you could be significantly overweight in your portfolio if you invest in any of these ETFs. That said the market looks like it was expecting all the financial stocks to go under and since they look like they will not many of the financial stocks are rebounding. There has already been a large run up but after the punishment financials took on the way down there could still be a lot more upside. There could also be downside if it turns out that recent market action was a short term rally and the market decides that it was undeserved many financial stocks could plummet.

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