Financial ETFs: Is It Safe to Go In the Water?

May 14, 2008 at 11:00 am by Tom Lydon

Alligatoranhingtrailbmx The depressed financial sector has investors champing at the bit to get back into those exchange traded funds (ETFs). The sector is ripe for temptation: after all, once it does turn around, it could help investors reap some nice rewards.

Michael Krause for Seeking Alpha points out that investors can’t rely on earnings predictions, since they can often be unreliable. Instead, the results show that while the financial sector is bleeding, there have been some profits, which implies the worst is behind us.

Estimates for the full year are still declining, and earnings are predicted to remain down for some time. But if the forecasts are correct, the sector is on pace to start posting steadily higher quarterly earnings in later quarters.

Is it safe to get back in? We think investors need to stick to the plan: don’t get in until the trend line is crossed (200-day moving average). Some of these funds have quite a ways to go before that happens.

  • Regional Bank HOLDRs (RKH), 8.8% below trend line
  • Financial Select Sector SPDR (XLF), 10.8% below trend line
  • iShares Dow Jones US Broker-Dealers (IAI), 9.7% below trend line

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1 Comments For This Post

  1. Richard Schweitzer Says:

    One “conservative” way to follow any major recoveries in the financials is DVY.

    DVY is heavily weighted to banks and financials (historic reasons, but has the backstop of some pharmacueticals, utilities, and others. Look at the composition of the DJ Select Dividend Index (available on the web).

    Financials rise the index rises, tho not fully proportionately. Same on downside.

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