The rate freeze gave financial exchange traded funds (ETFs) a boost, especially after news this week of Fannie Mae (FNM) joining Freddie Mac (FRE). Both are cutting their dividend and selling billions of dollars in special stock in an attempt to raise capital for a cushion. Fannie Mae announced this week that they are cutting the dividend 30% to 0.35 cents per share beginning the first quarter next year. Marcy Gordon for the Associated Press reports that this action is copying similar moves by Freddie Mac, their competitor in the $11 trillion home-mortgage market.

If the Fed cuts rates next week, will this also help stop the bleeding? CIBC World Markets Corp. announced that Citigroup’s (C) 2008 profitability will be hurt by their exposure to the highest-risk category of mortgages. Associated Press reports that Citigroup has more exposure to high-risk loans than any other company in the industry. Banks have already reacted to the credit crunch by tightening the lending standards which should help prevent higher rates of default. This may slow further economic growth as only those with top credit scores will be in a position to borrow.

Financial Select Sector SPDR (XLF) is down 13.4% year-to-date, but gained 3.2% after news of the rate freeze.  Citigroup makes up 7.9% of XLF, while Fannie Mae is 2.1% and Freddie Mac is 1.3%.

Tags: Financial, Sector ETFs