With the recent issues in the subprime industry, it is important to keep in mind the exchange traded funds (ETFs) that could be affected.  Residential homebuilders is one area that has traded lower, SPDR S&P Homebuilders (XHB) and iShares Dow Jones U.S. Home Construction (ITB) are down this year 8.6% and 14.7% respectively.  The key concern for ETF investors might be if the subprime deterioration were to spread to the conventional mortgage companies as foreclosures increase.

John Spence of MarketWatch.com adds that funds focusing on financial companies, bonds and real estate do have limited exposure to the mortgage market, but the effect will not be immediate.  Financial ETFs such as the Financial Select Sector SPDR (XLF) are seen at more risk from tighter mortgage lending standards because they own banks with large mortgage units. Overall, ETFs don’t have a lot of exposure to subprime, so right now the effect is minimal. It’s the specialized offerings that invest in lower-quality mortgages that are taking a big hit and will continue to do so if the subprime market gets messier.

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.

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