Instead of picking individual stocks, an investor may consider iShares Dow Jones U.S. Broker-Dealers (NYSEArca: IAI) for exposure to brokers, exchanges and other capital-market facilitators, writes John Spence for The Wall Street Journal. IAI’s main competitor is SPDR KBW Capital Markets (NYSEArca: KCE), which also provides a similar exposure to the sector.

Potential investors should note that firms included in the ETFs are highly dependent on, or correlated with, the broader capital markets.

Brad Hintz of Bernstein Research has said that large-cap broker-dealers are still cheap based on historical valuations. Hintz, however, warns that reduced leverage and low near-term profitability may dampen earnings growth.

No matter how high the financial sector has pulled out, the capital markets are still heavily reliant on government support. The Central Bank has kept rates at near zero to avoid a dip in recovery.

October is a notoriously poor month for stocks and bears are readying for an overdue market selloff. Whether this happens remains to be seen. Potential increased regulation in the financial sector will also create uncertainty for investors. Meanwhile, Barclays Capital has claimed improvements in liquidity has encouraged risk-taking and contributes to the market rallies.

If you’re considering investing in capital markets, have a stop loss in place.

• iShares Dow Jones US Broker-Dealers (NYSEArca: IAI): up 44.3% year-to-date; expense ratio of 0.48%

• SPDR KBW Capital Markets (NYSEArca: KCE): up 43.6% year-to-date; expense ratio of 0.35%

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

Max Chen contributed to this article.

Since the market lows on March 9, financials have rebounded handsomely, up as much as 140% since then. Most of them are perched firmly above their 200-day moving averages, as well.

There are a variety of ETFs that cover the sector. Because of the sector’s high profile, it is essential to know exactly what is under the hood of these ETFs.  The sector can be  subdivided into the following: broad-based, regional banks, capital markets, insurance and REITs.  John Gabriel of Morningstar breaks down the sector and provides an in-depth analysis of industries that constitute the financial sector.

The most widely held and common financial ETFs are broad-based financials, which include the SPDR Select Sector Financial (NYSEArca: XLF) and the Vanguard Financials (NYSEArca: VFH). Banks constitute nearly half of the asset base of XLF and 42% of VFH, insurance companies account for nearly 18% of XLF and 22.5% of VFH and capital markets soak up about 19% of both XLF and VFH.

In regard to the banking sector, some common ETFs investors look at are the SPDR KBW Bank (NYSEArca: KBE) and the PowerShares Dynamic Banking (NYSEArca: PJB). KRE is heavily exposed to banks operating in the Pacific region, nearly 25% of its assets, whereas PJB holds about 6% of its assets in this region.  Additionally, KRE is the only regional bank ETF which doesn’t hold stakes in large money center banks, whereas 10% of PJB’s assets are allocated to this specialty.

As for capital markets, investors can grab exposure to exchanges alongside brokers, money managers, and former investment banks through the SPDR KBW Capital Markets (NYSEArca: KCE) and the iShares Dow Jones US Broker-Dealers (NYSEArca: IAI). Both funds are nearly identical, except that KCE includes a sampling of traditional asset managers in its mix.

When it comes to insurance, investors can grab exposure through the PowerShares Dynamic Insurance (NYSEArca: PIC), SPDR KBW Insurance (NYSEArca: KIE) and the iShares Dow Jones U.S. Insurance (NYSEArca: IAK). The major difference between these ETFs mainly lies in their exposure to life insurers.  PIC has 3% of its assets to the subindustry, whereas KIE and IAK have 22% and 23% allocated to life insurers, respectively.

As for real estate investment trusts (REITs), the most common ETFs include the iShares Dow Jones U.S. Real Estate (NYSEArca: IYR) and the Vanguard REIT Index (NYSEArca: VNQ). A big difference between these two ETFs is that IYR contains mortgage REITs and unconventional holdings such as timber REITs and real estate services firms while VNQ limits itself to primarily conventional REITs.

In addition to knowing what an ETF holds, we suggest one watch the trendlines and have a strategy as this sector continues its recovery, as well.

For more stories on financials, visit our financial category.

Kevin Grewal contributed to this article.

After 100 days of new leadership, it’s time to evaluate the new administration’s progress. In regard to the economy, the banking crisis and the ways Obama will change the financial industry and its relation with real estate will fall under the microscope, NPR reports. NPR also has a timeline of key events so far in the new administration.

On Wall Street, investors were still unsure and mostly unfazed by a new presidency, remarks Jeff Cox for CNBC.

Obama has spent much of his time in office so far trying to right the financial system while boosting consumer confidence, health care, technology and taking some steps to ease the housing crisis. Is it working? There are some signs that the clouds appear to be lifting, but we’re not out of the woods yet.

However, some of the best-performing funds over the last three months are some of the sectors that Obama’s administration has been working to fix, directly or indirectly:

• iShares Dow Jones U.S. Broker-Dealers (IAI): up 28.5% year-to-date

• Broadband HOLDRs (BDH): up 26.7% for the last three months

• SPDR S&P Retail (XRT): up 30.4% for the last three months

While we’re seeing the clouds lift in some areas, there is much room for improvement in many others, including:

• iShares Cohen & Steers Realty Majors (ICF): down 5% in the last three months

• Utilities Select Sector SPDR (XLU): down 13.3% in the last three months

The masses are divided over the administration. They are giving Obama good personal approval ratings but express doubts over policies. The public is almost evenly divided over Obama’s economic reforms, but investors are warming up to the administration’s plans on helping the banking sector and its public-private toxic debt plan.

Obama got dealt a lousy hand. He took office during a recession, a banking crisis, a stock market collapse and rising unemployment. He also had to focus his resources on the root of the problem, the banks. The markets seem to be reacting well to the fact that there now appears to be a more defined plan.

We may have to go back to the well a few times more, but many on Wall Street feel that we may finally be on the road to a recovery.

Next up for Obama will be focusing on jobs – it’s hard to create them and think about them when you’re dealing with a banking crisis. Obama will also have to focus on stemming the tide of foreclosures and personal bankruptcies, as well.

For full disclosure, some of Tom Lydon’s clients own shares of XRT.

Max Chen contributed to this article.

U.S. stocks and exchange traded funds (ETFs) are in the red in morning trad

The Commerce Department reported that retail sales declined 1.1% in March, making it the biggest decline in the last three months and a far cry from the 0.3% increase that analysts had forecast. The decline was lead by a slump in auto sales, restaurant, furniture and clothing stores and electronics sales, states the Martin Crutsinger of the Associated Press.

On a positive note, the Labor Department reported that wholesale prices plunged a whopping 1.2% in March as a result of a sharp decline in the cost of gasoline, other energy products and food. This snapped a two-month stretch of price gains, which indicates that the recession is keeping inflation under control. Additionally, business inventories fell for a sixth straight month, posting a 1.3% decline and right on target with analysts’ expectations.

The retail industry is crucial to the overall state of the nation’s economy and is generally a great indicator of consumer confidence. The aforementioned decline in retail sales sent the SPDR S&P Retail (XRT) down about 1.3% in intraday trading, despite being up 26% year to date.

On a separate note, President Barack Obama spoke about the economy this morning in an effort to get control over the nation’s economic debate. He warned Americans that we’re not out of the woods, but made the case for his own agenda, reports Liz Sidoti for the Associated Press. His speech aimed to keep spirits up, while seeking to temper naively rosy expectations.

On more positive news, the Energy Information Administration reported that gasoline prices are expected to stay relatively low this summer.  The main reason behind this is basic economic equilibrium, with refinery production expected to increase by 240,000 barrels per day compared to last summer and the demand for the gasoline to remain relatively low because of the recession, states H. Josef Hebert of the Associated Press.

An ETF that will be influenced by gasoline prices is United States Gasoline (UGA), which is up about 1% in intraday trading and 27.2% year to date.

There is more good news out there for taxpayers.  With a better than expected earnings report and a 54% increase in stock price, Goldman Sachs (GS) announced that it plans on returning the TARP money it borrowed.  This repayment could pressure other banks to take measures to repay borrowed funds as well and the government may recoup some of the money it lent, states Christine Harper of Bloomberg.  This will most definitely impact the iShares Dow Jones US Broker-Dealer ETF (IAI), which is up 16.5% year-to-date; GS is 10.9%.

Last, but not least, more sunshine has hovered over Wall Street with better than expected earnings being reported by Johnson & Johnson (JNJ).  The diversified health care company reported earnings of $1.26/share, beating analysts’ expectations of $1.22/share and sending the company’s stock price up about 2% in morning trading.  Additionally, Goldman Sachs beat expectations by reporting a first quarter profit of $3.39/share, more than double that of the $1.64/share forecast by analysts.

Hopefully the trend of more good news will extend when CSX Corporation (CSX) and Intel (INTC) report earnings after the bell and Citicorp (C), JP Morgan (JPM) and General Electric (GE) release earnings reports later in the week.

All three major indexes, the Dow Jones Industrial Average, the S&P 500 and the Nasdaq were down about 1% in morning trading.

Kevin Grewal contributed to this article.

A group of very well-known and trusted economic advisers, lead by former Federal Reserve Chairman Paul Volcker, recommends the following steps to restructure the weak financial system, states The Economist. Among their ideas?

• Imposing strict capital requirement restrictions on banks, especially on high-risk proprietary activities – this will force investment banks to focus on client services and not so much on trading, leading to the separation of commercial and investment banks
• Raising the level at which banks are considered to be well-capitalized
• Hedge funds that have pools of private capital that live on borrowed money should have to register with a regulator and provide full transparency
• Bank-like regulation for money market funds, giving assurance of a stable net-asset value
• Set up a mechanism for dealing with non-bank failures and a more refined analysis of liquidity in stressed markets and more robust contingency planning
• Central banks need to have a more vital role in policing such things, need to be vigilant during times when credit is expanding and be more involved in supervising bank safety and soundness
• A formal system of regulation for over-the-counter derivatives
• Urge regulators to force banks to hold on to a significant portion of credit risk when they package loans into securities and sell them on as well as more flexibility in the guidelines for loan-loss reserves
• Rethink certain accounting policies and procedures, like mark-to-market
• Enforcement and rule-making should be in harmony around the globe; after all this is a global crisis

Some ETFs to take a look at that could be influenced if the Obama administration practices what Volcker and his team preaches are the following:

iShares S&P Global Financials Sector Index Fund (IXG): down 17.4% in the last month

PowerShares Dynamic Banking Portfolio (PJB): down 12.8% in the last month

Stephen Bernard and Tim Paradis for the Associated Press report that investors are uneasy as The Royal Bank of Scotland forecast that losses for 2008 may top $41.3 billion, as Britain struggles by injecting more money into financial systems. The injections are an attempt to keep banks from falling under, just as the U.S. has doen for Citigroup and Bank of America.

Meanwhile, there is a continued focus on earnings reports. The big names today:

• Johnson & Johnson (JNJ), which reported that fourth-quarter profit rose 14%, topping forecasts.
• CSX (CSX) will report after the market close.
• Josh Funk for the Associated Press reports that TD Ameritrade Holding Corp. (AMTD) reported a fiscal first-quarter profit drop at 23%, cutting their total years outlook and reducing costs up to $60 million.

iShares Dow Jones US Broker Dealers (IAI): down 22.3% for past three months; AMTD 4.3% of holdings

Saudi Arabia is cutting production as of Jan. 1, while Russia and Azerbaijan are cutting hundreds of thousands of barrels from production, reports George Jahn for Associated Press. This is the largest single production cut ever from OPEC nations and the only comparison was four years ago and the cut was done in stages.

• While OPEC’s cut is meant to drive oil back up to higher prices, other recent cuts haven’t done much to accomplish that goal. At two previous meetings, the countries agreed to cut output by 2 million barrels per day, but demand kept falling and stockpiles kept rising. 
• In fact, this morning, oil prices are still falling despite the cuts.

Within the tech realm, the chief executive of Apple Inc. (APPL) has declined to give his keynote speech at the upcoming tech show in San Francisco, breaking tradition and causing company shares to falter on concerns about his health.

This will be the last Macworld show and a product marketing executive is going to deliver the opening keynote speech instead, reports Reuters. Reasons for Steve Jobs to skip the Macworld show are rumored to be commercial, especially since the company is going to discontinue the show here on out.

• Technology Select Sector SPDR (XLK): down 39.7% year-to-date;Apple 5.54%

Morgan Stanley (MS) is struggling with the ghost of old investments, as the company reported fourth quarter losses at $2.36 billion, or $2.34 per share. Morgan reported a full-year profit of $1.59 billion, or $1.54 a share and this was the company’s first loss this year.

Louise Story for The New York Times reports that revenues in every area of the bank were down and this is a clue that the business environment is suffering on all levels. Losses within the company this year did not outweigh the profit earned earlier this year.

Goldman Sachs (GS) also posted a fourth-quarter loss of $2.1 billion, its first since going public in 1999. Goldman has long been the most profitable of the Wall Street’s largest firms, Bloomberg says.  

• iShares Dow Jones U.S. Broker-Dealers (IAI): down 60.7% year-to-date; Morgan Stanley is 5.4%; Goldman Sachs is 8.1%

The European and Asian economies woke up to a deepened crisis today, and the global markets ended mixed.  Stocks in London and Paris actually rose today, while some Asian markets sold off heavily overnight, reports Michael M. Grynbaum for the New York Times. In Tokyo, the Nikkei lost 4.1% to close at a three-year low. Australia lost 4.4% and at one point had lost more than 5%.

Russia was particularly hard-hit by the failure of the bailout, suffering such steep losses that trading was halted for two hours, reports Catrina Stewart for the Associated Press. Russia’s economy is heavily dependent on oil, and sliding prices have weighed heavily on the country.

Some analysts say that the threat to the credit markets poses more of a problem for the health of the economy than the plunge in stocks, because so many businesses use those markets to finance daily expenses such as utilities and payroll.

The U.S. dollar fell to a four-month low against the yen yesterday, as investors hightailed from risky positions, Rika Otsuka for Reuters reports. Today, however, the dollar gained 2% on renewed optimism that a bailout deal would be approved.

Financial ETFs are trading higher early today:

• Financial Select Sector SPDR (XLF), down 34.7% year-to-date
• iShares Dow Jones U.S. Broker-Dealers (IAI), down 46.8% year-to-date
• PowerShares Dynamic Financials (PFI), down 18.8% year-to-date

Gouldman Sachs (GS) said that it has received $5 billion in a common stock offering as part of a plan that also includes an investment of at least $5 billion by investor Warren Buffett, reports Stephen Bernard for the Associated Press.

This is just days after Goldman got the go-ahead to convert into a bank holding company instead of an investment bank. By doing so, both Goldman and Morgan Stanley (MS) avoided the fate of Bear Stearns and Lehman Brothers.

The FBI has gotten involved with an investigation into the companies at the heart of the meltdown of the U.S. economy, says Lara Jakes Jordan for the Associated Press. The bureau is looking at potential fraud by mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE), along with American International Group (AIG) and possibly Lehman Brothers.

With these four firms added to the mix, the total number of inquiries taking place right now totals 26.

Lawmakers in Washington are still considering the bailout package.

Financial ETFs are trading mixed this morning:

• Financial Select Sector SPDR (XLF): down 27.9% year-to-date; AIG is 4.1%; Morgan Stanley is 2.6%
• iShares Dow Jones U.S. Broker-Dealers (IAI): down 42.2% year-to-date; Goldman is 10.9%; Morgan Stanley is 8.7%
• Vanguard Financials (VFH): down 22.8% year-to-date; AIG is 3.1%; Goldman is 3.1%

Wall Street is following up two days of huge gains with a drop of more than 150 points. Leaders in Congress are endorsing the main point of the $700 billion plan, but are calling for other things such as independent oversight, protections for homeowners and limits on excessive executive compensation, reports Louise Watt for the Associated Press.

While the government weighs its options, oil is heading up higher again near $107 a barrel.

Meanwhile, Wall Street’s last two investment banks are no longer: Goldman Sachs (GS) and Morgan Stanley (MS) are becoming bank holding companies in order to stay in business, reports Martin Crutsinger for the Associated Press. The move will allow them to create commercial banks that can take deposits and continue under the direct regulation of the Federal Reserve.

American International Group’s (AIG) former CEO Robert Willumstad rejected a $22 million severance payment, Savio D’Souza for Reuters reports. Willumstad rejected the severance on the basis that he wasn’t able to execute the plan for restructuring that he had developed.

• Financial Select Sector SPDR (XLF), down 21.3% year-to-date
• Regional Bank HOLDRs (RKH), down 6.5% year-to-date
• iShares Dow Jones Broker-Dealers (IAI), down 38.1% year-to-date