ETF Spotlight: Financial Sector

May 24th at 6:00am by Tom Lydon

Regulators are considering changes to the way big banks operate in light of JP Morgan’s (NYSE: JPM) recent loses. Meanwhile, financial exchange traded funds have been reeling in the aftermath.

Financial sector ETFs, like Financial Select Sector SPDR (NYSEArca: XLF), Vanguard Financials ETF (NYSEArca: VFH) and iShares Dow Jones US Financial Sector (NYSEArca: IYF), have dropped about 4% over the past week.

JP Morgan has plunged almost 21% since revealing its $2 billion trading loss on synthetic credit products, reports Jonathan Stempel for Reuters. [Financial ETF Pares Decline After JP Morgan Loss]

On Monday, a complaint was filed with the U.S. District Court of Manhattan that accused JPMorgan of violating their duties to 401(k) and other retirement participants.

“The plans suffered hundreds of millions of dollars of losses,” the complaint said. “If defendants had discharged their fiduciary duties to prudently manage and invest the plans’ assets, the losses suffered by the plans would have been minimized or avoided.”

After the heavy losses, the dangers of regulating large banks has once again been put under the spotlight.

“This is why you want these companies to have plenty of capital,” St. Louis Fed President James Bullard said in another Reuters report. “I would back my colleague (Dallas Fed President) Richard Fisher in saying that we should split up the largest banks.”

While JP Morgan licks its wounds, other large banks could be capitalizing on the losses. A dozen banks, including Goldman Sachs (NYSE: GS) and Bank of America (NYSE: BAC), may gain a profit of $500 million to $1 billion on credit default swap trades that JPMorgan’s Chief Investment Office was dumping, reports the Wall Street Journal.

Financial Select Sector SPDR

For more information on the financial sector, visit our financial category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.