Back to top ETF Strategist Eric Dutram highlights: Three Financial ETFs That Avoid Big Bank Stocks

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Chicago, IL – May 22, 2012 - Stocks and funds in this article include: JP Morgan (JPM - Free Report) ), PowerShares S&P SmallCap Financials Portfolio (PSCF - Free Report) ), UBS E-TRACS Wells Fargo Business Development Company ETN (BDCS - Free Report) ), First Trust NASDAQ ABA Community Bank Index (QABA - Free Report) ).  Eric Dutram looks at three ETFs which can allow investors to keep exposure to the financial sector without dealing with the issues of the big banks.   

Three Financial ETFs That Avoid Big Bank Stocks written by Eric Dutram of Zacks Investment Research:  

The past month has been pretty unkind to the big banks for a variety of reasons. Speculation continues to build regarding a broad European default centered around Greece which could trigger a number of issues for many banking stocks in the near term.


Beyond this, the focus has been on JP Morgan (JPM - Free Report) , often considered the best run big bank on Wall Street after the crisis of 2008. However, the firm has been under fire as of late thanks to a massive $2 billion trading loss at the company’s London desk (see more on ETFs at the Zacks ETF Center).


Although the loss was relatively small given that the trade was over $100 billion, the move is causing many to question the ability of large banks to police their own offices and properly manage their own trading desks without more government supervision. In fact, many regulators are already reviewing the situation while Fitch Ratings has lowered the firm’s credit rating by one notch to ‘A+’.


The big dollar amount of the loss has also renewed political calls for more banking oversight, a trend that has only been exacerbated by the upcoming elections. Now, thanks to the perception that if this can happen to JPM it can happen to anyone, along with the political softball that this situation has provided many in Congress, many are forecasting that more regulation could be on the way for the sector (also see The Complete Guide to Preferred Stock ETF Investing).


Overall, the focus has been on the return of the Glass-Stegall Act, tougher draft rules on the Dodd-Frank bill or the so-called ‘Volcker Rule’. With these potentially stiffer rules, the profitability of banks could suffer across the board while their future activities could be limited as well.


In addition to this, there are also worries that JPM could see even greater losses stemming from the unwinding of its trade which could push the $2 billion loss far higher. With JP Morgan facing this issue there are also concerns that similar problems could be underneath the surface of many other large banks causing many investors to head for the exits in the space.


In fact, over the past month, XLF has fallen by about 4.7%, while more focused products such as IYG and RKH have fallen by even greater amounts; 6.7% and 9.3%, respectively, in the time period (read Three Financial ETFs Outperforming XLF).

Fortunately, the weakness hasn’t permeated all segments of the financial sector and there are some good choices left in the space. In particular, a focus on smaller banks or more obscure segments of the financial ETF world could be the best way to go in this heightened risk environment.


Furthermore, looking at more U.S. focused securities could help to insulate investors from the worst of the European debacle, a situation which could impact many large banks even if further regulations are not realized. For investors looking to apply this approach, any of the following three financial ETFs could be great picks that stay in the sector but avoid big bank exposure:

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Contact: Eric Dutram
Phone: 312-265-9462

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