The banking industry has been on a wild ride over the past few years, as the unprecedented economic environment of 2008 resulted in a wave bankruptcies and bailouts that many figured would forever change the business. But less than two years removed from the disaster, many financial institutions have staged an impressive return to glory, delivering record profits and approving massive bonuses that have reignited the “Wall Street vs. Main Street” debate. Despite its best efforts to sidestep the spotlight, the banking industry figures to be in focus in coming months as investors digest earnings reports and debate over both responsible and effective compensation policies rages.
Despite continued writedowns on real estate operations, the Goldman Sachs and JP Morgans of the world have been boosted by surges in revenues from debt and equity underwriting and trading activities. But now yet another changing economic environment threatens to deal the industry a setback as earnings season gears up. “Analysts are cautioning that fourth-quarter investment banking earnings suffered a significant ‘early Christmas’ slowdown on the back of falling fixed-income revenues,” writes Harry Wilson. “The fall is blamed on a continued drop in market volatility, which has reduced the profitability of credit and rates trading businesses that had been benefiting from record high bid/offer spreads earlier in the year.”
Bonus Debate Intensifies
As financial institutions that received government bailouts return to profitability, hefty bonus payments made to reward and retain top talent have returned as well. Goldman Sachs is expected to pay its employees an average of $595,000 this year, while JP Morgan is expected to pay out $463,000. With unemployment at a 26-year high, public fury over such massive bonuses to individuals many view (often unfairly) as responsible for the downturn has spiked. “We are on the cusp of what is going to be the most highly visible and contentious bank bonus season in history,” writes Jonathan Macey. “Bonuses are predicted to run into the billions of dollars, and many of the banks that got the most bailout money are paying the biggest bonuses.”
Once upon a time, such public outrage could have been calmed by an effective public relations campaign, visible acts of charity, and the simple passage of time. But in the post-bailout era, the heads of major Wall Street banks were hailed before Congress, and asked to justify seemingly excessive compensation at a time when many Americans continue to struggle. And it appears that the outcome may be far more than a slap on the wrist. President Obama is expected to announce on Thursday plans to raise as much as $120 billion over several years to help recoup losses from the Troubled Asset Relief Program. These developments will be closely monitored on Wall Street, as investors try to determine the bottom line impact on companies that would be affected by the “bank tax.”
Bank ETF Options
As earnings reports begin to trickle out and the debate over bonus payments continues to evolve, financials ETFs figure to be in focus in coming weeks. ETFdb Pro members can read more about the drivers of financials ETFs in our ETFdb Category Report (if you’re not a Pro user yet, sign up for a free trial or read more here). Below we highlight three of the financials ETFs that could see a big move before the end of the month (see a complete list of financials ETFs):
- Financial Select Sector SPDR Fund (XLF): The most popular financial ETF, XLF is dominated by holdings in the usual suspects: JP Morgan, Bank of America, Wells Fargo, Goldman, and Citi account for about 40% of holdings. XLK has about 80 individual holdings and charges just 0.21% in expenses.
- iShares S&P Global Financial Index Fund (IXG): While XLK focuses primarily on U.S.-listed financial institutions, this ETF maintains a global focus. In addition to the major components of XLK, HSBC, Banco Santander, Commonwealth Bank of Australia, Royal Bank of Canada, BNP Paribas, and Banco Bilbao all have major weightings in this fund. In total, IXG maintains exposure to more than two dozen countries.
- RevenueShares Financials Sector Fund (RWW): This fund is comprised of the same securities as the S&P 500 Financials Index, but each component is ranked by top line revenue instead of market capitalization. Revenue-weighted ETFs delivered impressive results in 2009, outperforming cap-weighted ETFs by a wide margin (read more about the methodologies behind this ETF in this feature).
For more actionable ETF ideas, sign up for our free ETF newsletter.
Disclosure: No positions at time of writing.