In the wake of tighter regulations, banks are apparently doing what it was hoped they’d do: scale back on risk. Could this make investors more comfortable about investing in financial exchange traded funds (ETFs)?

Wall Street – along with Europe’s banks – has apparently gone vanilla. Stock trading, which used to be a major source of revenue, has tapered off. International bank capital requirements are going to be finalized next month, and they’ll force many banks on both continents to ditch trading things like mortgage securities. [Financial ETFs Move Higher After New Banking Rules.]

If they want to keep risky assets, then capital will need to be set aside as a buffer, Carrick Mollenkamp, Liz Rappaport and Aaron Luchetti for The Wall Street Journal report. Banks seem to be getting ready for the new rules by incorporating lower-risk now. [One ETF to Play Financial Reform.]

What might this mean for financial ETFs? That’s still an open question. But if banks comply, profits might be more constrained, but it may introduce a measure of stability into the system. As always, a trend following strategy can help you determine if there’s any potential long-term uptrend in place.

Domestic financial ETFs:

  • iShares Financial Services (NYSEArca: IYG)
  • KBW Capital Markets (NYSEArca: KCE)
  • Financial Select Sector SPDR (NYSEArca: XLF)

International financial ETFs:

  • SPDR S&P International Financial Sector ETF (NYSEArca: IPF)
  • iShares S&P Global Financials (NYSEArca: IXG)

Tisha Guerrero 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.