After Banks Raise Capital, Where Do Financial ETFs Go Next?

The nation’s largest banks were ordered to raise at least $85 billion after stress test results were released. Now there are just two questions: Did they do it? And what’s it going to mean for financial exchange traded funds (ETFs)?

The good news is that the banks raised $85 billion, and then some, in a month. The dollars they’ve amassed are less than needed.

The total value of shares sold by 19 financial firms that were stress-tested by the government is at $65 billion, since May 7. Non-guaranteed debt sales and the conversion of preferred shares to common stock have generated roughly $20 billion, for a total of $85 billion or more.  Most of the banks have considerably more capital than U.S. regulators have required them to generate as they ride out the recession, reports David Enrich, Aaron Lucchetti and Dan Fitzpatrick for The Wall Street Journal.

The banks are shocked by the capital streaming in, especially since three months ago investors did not want to touch shares in the sector with a 10-foot pole. The prospect for banks to fall into oblivion is less likely, so banks may be looking attractive and cheap to some investors from a price-to-earnings ratio. Some of these funds are still sitting a hair below their trend lines, however, so keep an eye out.

As of Tuesday, J.P. Morgan Chase (JPM), Morgan Stanley (MS) and American Express (AXP), along with Keycorp (KEY) sold a combined $8.7 billion in common stock. Financial ETFs seem to be reacting well to the positive news so far.

• Financial Select Sector SPDR (XLF): down 2% year-to-date; J.P. Morgan Chase 13.4%; American Express 3.2%; Morgan Stanley 2.8%