After a volatile day of trading, U.S. stocks managed to bounce back from yesterday’s steep sell off as several long-anticipated global bank downgrades surprisingly led financials higher. Obviously the name of the game today is “buying on bad news”, a trend that has frequently popped up on Wall Street over the past couple of weeks. From another perspective, this morning’s rally could simply be the case of markets taking a breather from yesterday’s brutal pounding. Similarly, investors could also be looking at the downgrades as a necessary correction, eliminating the threats of the unknown and of prior bank speculations [see also 101 ETF Lessons Every Financial Advisor Should Learn].
Moody’s Investors Service laid its cards on the table today, delivering a major blow to the financial industry. More than a dozen global banks were downgraded, reflecting the sector’s struggle to keep afloat amidst slow economic conditions. To add to the list of growing domestic concerns, five out of the six largest U.S. banks were affected by today’s downgrades, including Morgan Stanley, J.P. Morgan, Bank of America, Citigroup, and Goldman Sachs. Since these downgrades are expected to raise borrowing costs and have a major impact on how capital will be raised, investors will likely keep a close and cautious eye on the banking sector for quite some time [see ETF Technical Trading FAQ].
Below we outline one ETF that has been impacted by today’s major headlines:
State Street Financial Select Sector SPDR ETF (XLF)
Not surprisingly, this ETF inched higher as financial stocks led the way for this morning’s rally. With just over 80 individual securities, this top-heavy ETF allocates nearly half of its total assets to its top ten holdings, which include four of the five newly downgraded U.S. banks. Currently, XLF is up 0.52% on the day (as of 11:45 AM June 22, 2012). Several other bank and financial ETFs, including KBE and VFH, are also up at the time of writing [see our Financials Free ETFdb Portfolio].
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