ETF Trends
ETF Trends

Prior to the November 6 election, financials had been enjoying quite the performance ride in 2012 as one of best-performing sectors in the S&P 500 Index. However, on November 7, 2012, the day following the re-election of President Obama to a second term, many of the larger U.S. banks declined significantly.

Why the fall? A few potential explanations:

1) Cashing In on Intra-year Gains: After the strong run this year, investors may have taken some of their capital gains in financials to the bank before facing potentially higher capital gains taxes in 2013. Anytime a sector has such a strong run compared to other sectors, it certainly becomes susceptible to investors taking profits and redeploying their funds elsewhere—especially given the president’s proposal to raise capital gains taxes on higher-income investors.

2) Regulation and anti-banker sentiment to continue: Investors are concerned about the financial sector’s potential moving forward due to the election results. With the re-election of President Obama, the increased regulations of the Dodd-Frank Act are now unlikely to be repealed. Some of the run-up in financials may have been a belief that Governor Romney had the potential to come in and scale back some of the harsher regulations contained in this law.

3) Subdued growth outlook: Another potential explanation for the decline could be that financials are particularly leveraged to economic growth—meaning that their business prospects are very sensitive to economic growth expectations—and when viewed through the (admittedly limited) prism of the S&P 500 Index’s large sell-off following the election, one could reason that this was a lowering of economic growth expectations being factored in.

The WisdomTree Dividend ex-Financials Fund (NYSEArca: DTN)—Maintain Equity Exposure but Exclude Financials

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