Will Dodd’s Exit Help Or Hurt Financial ETFs?

by on January 7, 2010 | ETFs Mentioned:

After sweeping into power last year, democrats have fallen on hard times. Approval ratings are slipping across the board and several incumbents are vulnerable heading into mid-term elections. The latest blow came from Senator Chris Dodd, the Chairman of the powerful Senate Banking Committee, who announced that he will not be seeking reelection later this year and will retire in December.

Dodd has been a very controversial figure over the past few years thanks in large part to his ties to the financial service industry. Dodd has raised millions from financial professionals and has found himself mired in controversy over two loans he received from Countrywide. He also came under fire for his handling of bonuses from AIG, where Dodd supported a measure that allowed the embattled insurance company to make payouts to its executives. At the start of the year, Dodd found himself far behind in the polls in Connecticut, where according to Real Clear Politics, he was down by double digits in late 2009.

While the announcement is obviously a negative development for the Democratic party, the impact on the financial industry is less clear. How Dodd handles his last few months in office could have a major impact on U.S. efforts to enhance bank and capital market regulations and push for global reforms. Dodd introduced an 1,139-page reform bill in November that was in many ways more ambitious than the 1,279-page bill pushed through the House of Representatives last month by Representative Barney Frank. His position at the head of Banking Committee has put the success of financial reforms squarely on his shoulders.

Mixed Opinions

Some argue that this announcement will give a boost to financial reforms. “We’re hopeful it clears his decks to focus like a laser beam on the real problem of helping Main Street get out from under the mess Wall Street left us in,” said Ed Mierzwinski, program director for the U.S. Public Interest Research Group.

Others take an opposite view, arguing that “without the imperative of winning votes for reelection, Dodd may be less motivated to press a populist reform agenda, making him more prone to compromise on controversial issues.” Alternatively, Dodd’s decision to step down could ultimately prove insignificant in the push for financial reform. “Dodd’s announcement is a neutral for banks as we do not expect it to impact financial reform legislation,” said policy analyst Jaret Seiberg at investment firm Concept Capital. “Dodd was already going to have to compromise … if he wanted to enact the bill.”

Many see Senator Tim Johnson (D-SD) as the heir apparent for the Chairmanship of the Senate Banking Committee. He is seen as a ‘friend of the credit card industry‘ and was the only democrat to vote against last year’s credit card reform bill.

Financial ETFs In Focus

For investors looking to make a play on the financial sector, there are no shortage of ETF options. ETFdb ro members can read more about the drivers of financials ETFs in our ETFdb Category Report (if you’re not a Pro member, sign up for a free trial or read more here). Funds that could be on the move in coming months as the financial reform debate continues include:

  • iShares Dow Jones U.S. Financial Sector Index Fund (IYF): This ETF is designed to track the performance of the financial sector of the U.S. market, including banks, insurance companies, real estate firms, and general financial institutions. Major holdings in IYF include all the big names in the financial sector: JP Morgan, Bank of America, Wells Fargo, Goldman Sachs, and Citigroup make up more than 30% of IYF.


  • SPDR KBW Bank ETF (KBE): This ETF is designed to deliver exposure to publicly-traded companies that do business or banks and thrifts. This ETF has 26 individual holdings, including both national and regional banks. KBE has already gained more than 6% this year.


  • SPDR KBW Capital Markets ETF (KCE): While this fund also offers exposure to financials, it maintains a very different focus than KBE and IYF. KCE seeks exposure to broker-dealers, asset managers, and trust and custody banks. Major holdings include State Street, CME Group, Janus, Lazard, Raymond James, and Jefferies.


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