Latest news, trends and ideas for investing with exchange traded funds | ETF Commentary

The WSJ’s John Spence writes that the popular exchange traded funds that focus on financial stocks will be put to the test by this week’s earnings announcements.

The $7 billion Financial Select Sector SPDR Fund (XLF) is expected to be particularly sensitive to the earnings news of large banks due to the fund’s concentrated exposure to Wall Street.

Top holdings for XLF include JP Morgan Chase (11.6%), Bank of America (10.9%) and Wells Fargo (9.7%).  JP Morgan reported earnings last Friday while Bank of America and Wells Fargo are scheduled to report earnings today before the market opens.

Other financial ETFs mentioned in the Spence piece include the Direxion Daily Financial Bear 3x Shares (FAZ) and SPDR KBW Bank ETF (KBE).

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John Spence is reporting on MarketWatch that Financial ETFs were routed as Citigroup plunged more than 20% in today’s trading.

Citi is a large component of State Street’s Financial Select Sector SPDR Fund (XLF) which was down over 10% today. ETF investors who took a short position in ProShares UltraShort Financials (SKF) were up over 21% today.

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Smart Money’s Jack Hough recently interviewed Rob Arnott, former editor of the Financial Analysts Journal and founder of Reasearch Affiliates, to find out what Rob likes now.

One area where Arnott sees value is financial services etfs. The logic is that bank failures and combinations will make the surviving banks stronger with more market share and pricing power. Financial services ETFs include the Dow Jones U.S. Regional Banks Index Fund (IAT), KBW Regional Banking ETF (KRE), and KBW Bank ETF (KBE).

Arnott’s firm has also developed a series of indexes based on research he has done on dividends and stock performance. Several ETFs have launched using the Research Affiliates Financial Index (RAFI) as a benchmark including the PowerShares FTSE RAFI Consumer Goods Sector Portfolio (PRFG) and the FTSE RAFI US 1000 Portfolio (PRF).

For a complete listing of RAFI-based ETFs, see the ETF Directory or type RAFI in the site search box on ETF MarketPro’s website.

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SmartMoney’s Rob Wherry reports that banking ETFs were the hardest hit in Thursday’s trading after the SEC lifted a temporary ban on short sales and the credit crisis continued to pressure the market.

The SPDR KBW Regional Banking ETF (KRE) lost 14.1%. Its counterpart, iShares Dow Jones U.S. Regional Banks (IAT), fell 12.4%.

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SmartMoney’s Rob Wherry looks at the impact of the news that an RTC-like entity is in the works to address the credit crisis in his article Government Bailout Plan Sends ETFs Higher.

Wherry notes that the development was good news for financial ETFs including the SPDR KBW Capital Markets (KCE), the iShares Dow Jones U.S. Regional Banks ETF (IAT), and the SPDR KBW Regional Banking Fund (KRE).

The surprise move by central banks in key markets to pump cash into their financial systems drove stocks higher on Friday and left short sellers scrambling for cover. The ProShares UltraShort FTSE/Xinhua UltraShort China 25 (FXP) declined 24% on Friday.

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Smart Money’s Rob Wherry looked into the impact of Wall Street’s financial troubles in his article Lehman, AIG Drag Down Financial ETFs.

Wherry notes that Lehman’s share price spiraled lower as it tried to find an outright buyer and any government intervention seemed like a long shot.

The iShares Dow Jones U.S. Broker-Dealers ETF (IAI) was down 15.4% last week and the iShares Dow Jones U.S. Insurance ETF (IAK) lost 10.5%, mostly due to the selloff in AIG shares.

For additional analysis, see the article “Lehman, Merrill, AIG and BofA” at ETF MarketPro.

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