Tag Archives: Financial Select Sector SPDR

Europe’s Financial Crisis Sends U.S. Stocks Lower

Fears over the state of European banks after the European Central Bank lent dollars to a eurozone bank sent European markets plunging and have started a huge sell-off in the U.S. One bidder borrowed $500 million from the ECB and the news suggests at least one bank is having problems getting the cash it needs, according to Financial Times and CNBC.

At Thursday’s close, the SPDR S&P 500 (SPY) tumbled 4.3% to $114.51.
The SPDR Financial Select Sector Fund (XLF) sunk 4.8% to $12.38.
The SPDR Technology Select Sector Fund (XLK) fell 4.9% to $23.08.
And finally, the SPDR Gold Trust (GLD) rose 1.9% to $177.72.

Last week regulators in Italy, Belgium, France and Spain banned short-selling of financial stocks in an effort to curb volatility and bring some order to markets. How is that working out for you? Meanwhile, it’s nearly impossible to get any numbers on the shorting of U.S. stocks or ETFs on short notice, I wouldn’t be surprised if investors were using U.S. ETFs to short the European financial stocks.

Meanwhile, here are 4 funds that measure global financial stocks.
iShares MSCI Europe Financials Sector Index Fund (EUFN), of which banks make up 52% of the portfolio, plummeted 8% to $16.68.
iShares S&P Global Financials Sector Index Fund (IXG) plunged 5.2% to $36.99.
SPDR EURO STOXX 50 (FEZ) dived 5.5% to $31.06.
iShares MSCI United Kingdom Index Fund (EWU) skidded 4.6% to $15.71.

Finally, the ProShare UltraShort MSCI EAFE Fund surged 9.7% to $28.75. With a ticker of (EFU), this is probably the most appropriate sentiment of the day.

9 ETFs Make Up 18% of Total U.S. Volume

Abel/Noser, an agency-only broker, released a market liquidity study for July saying ETFs dominated trading on the U.S. stock markets, with nine ETFs representing 18% of the total daily domestic volume, reports StreetInsider.com.

Those nine ETFs were: the SPDR (SPY), iShares Russell 2000 Index (IWM), PowerShares QQQ (QQQQ), iShares MSCI Emerging Markets Index (EEM), SPDR Gold Shares (GLD), UltraShort S&P500 ProShares (SDS), iShares MSCI EAFE Index (EFA), Financial Select Sector SPDR (XLF) and Direxion Daily Financial Bull 3X Shares (FAS).

According to the July ETF Report released by the National Stock Exchange today, the top five ETF providers in terms of volume, in descending order, are State Street Global Advisors, BlackRock, ProShares, Direxion and Invesco/PowerShares. Together, their share volume for the month of July was 27.6 billion shares, or 54% of the NYSE Group Volume in all stocks traded, 50.6 billion shares. This number doesn’t include Nasdaq volume.

In addition, Abel/Noser said six stocks accounted for more than 10% of the domestic principal traded. The six stocks: Apple, Bank of America, Citigroup, Microsoft, Exxon Mobil and Intel.

The top 105 stocks represented more than half of the day’s volume, says the study, while the top 975 names accounted for 90% of all the volume. The renaming 17,399 securities accounted for just 10% of the daily volume on the market. These numbers were little changed from June.

Top Movers in a Volatile Market

Street Insider.com lists some of the most active ETFs today.

At 2 pm:

iPath S&P 500 VIX Short-Term Futures ETN
(VXX) rose 8.37% to $28.30, on midday volume of 44 million shares, already four times more than its daily average volume. The ETF tracks the CBOE VIX, which is up 28.5% today to a near-term high of $42.15.

United States Natural Gas (UNG) gained 1.2% to $6.89 midafternoon on volume of 20.2 million vs. 26.8 daily average.

Utilities Select Sector SPDR (XLU) up 0.34% to $29.35, volume was already double the daily average at 10.6 million. People are moving to utilities for safety and dividends.

United States Oil (USO) fell 1.89% to $36.26 as crude oil futures posted steep losses for the fourth consecutive day. Mid-morning, the June 10 contracts hit an 11-week low near $74.50 a barrel, but were down $1.46 to $75.43 late afternoon. Volume was up 80% to 18 million.

Financial Select Sector SPDR
(XLF) was actually flat at 2 p.m. at $15.26. Volume had surged to 260 million from a daily average of 103 million. Goldman Sachs (GS) is up 1.7% to $144.65 in the wake of its annual shareholder meeting.

Pressure on Gold May be Buying Opportunity

The Goldman story is affecting gold according to 24/7 Wall Street. On Friday, the SPDR Gold Shares (GLD) lost 2.1% to $111.24. The guys at 24/7 reason that the Paulson & Co. hedge fund implicated in the scandal is heavily invested in gold. However, if investors pull out, the fund may need to sell gold to cash them out, putting downward pressure on the yellow metal. I think this is argument is a nonstarter. Most hedge funds require 60 to 90 days notice before investors can cash out. So, this sell off won’t happen for a while. This means, that gold may have been beaten down without good reason, and that Monday is a buying opportunity.

Meanwhile, The New York Times said on Saturday that Wall Street firms tent to settle cases like this one, but Goldman’s statement on Friday that it intends to fight may create a big problem. While the refusal to settle was intended to discourage investor lawsuits, this could set Goldman up for a long, messy public battle. The paper added that several European banks that lost money in the deal may try to recoup the money from Goldman.

Then Sunday, the Times added two congressmen want a deeper investigation into taxpayer losses while Britain’s prime minister asked his country’s securities regulator to investigate the Goldman due to losses incurred by the Royal Bank of Scotland. Germany added it may take legal action as well.

It appears Yahoo!Finance had it wrong. They didn’t even mention the volume of the Financial Select Sector SPDR (XLF) which was the third most traded stock on Friday with 380.6 million shares traded, topping the SPDR (SPY) and Direxion Daily Financial Bear 3x (FAZ), which it said had the third highest volume. On Friday, XLF fell 3.7% to $16.36 and the ProShares Ultra Financials (UYG), the one that gives 2x the positive return on the financial sector, lost 6.6% to $71.65.

Making the Case for Index Funds

Investing is long term. Speculation is short term.

Can you watch the market every day? If not, you should invest, rather than speculate. Without a doubt indexing is the way to invest. The crash of 2008 has not only highlighted the risk of owning single stocks, but also exposed the dirty underbelly of actively managed mutual funds.

Going for the index avoids getting stuck with the stocks that might be left behind. If you believe in the concept of diversification, then single stock risk is just too huge of a risk to take. And while you might be able to buy 20 stocks and build out a nice portfolio, one bad stock can wipe out 5% of your portfolio and two bad stocks decimate the fund. (Get it? Decimate? Remove 10%. Ok, moving on. …)

If you want to own financials, 30 are better than two stocks. If the two financials you owned last year were Bear Stearns and Lehman Brothers, you, my friend, have completely lost your portfolio of financials, and maybe your entire portfolio. Buying an index fund tracking the financial sector of the S&P 500, such as the Financial Select Sector SPDR (XLF), gives you 80 stocks, about 11% of the S&P 500. You can get more exposure to one narrow niche of the market and diversification at the same time, hence less risky. Sure, the financials took a hit, but considering most of them are still in business, you still have some of your investment.

So, single stock risk is out if you’re not buying for dividends. But what about actively managed mutual funds? The whole point of the actively managed fund is to give you, the investor, alpha, those extra percentage points of return that comes from the fund manager’s skill and intellect. The financial crisis has shown how hard it is to find true alpha.

It’s pretty much common knowledge these days that only about 20% of active fund managers beat the major market benchmarks. Considering many active funds are essentially index fund copycats, you will never beat the market with their huge management fees. Fund managers counter that even if they don’t beat the market going up, they at least have the ability to post narrower losses on the way down, because they can sell off the worst performing sectors while the index can’t. I think a little bit of research will show they are also posting returns worse that the indexes on the loss side as well.

And even those that don’t post worse losses, is a 35% loss that much of an improvement over a 37% loss?

So, if you eliminate single stock purchases and actively managed funds, deductive reasoning says you must go with the index. Of course, this mostly applies to U.S. equities. In some markets, such as emerging markets, a smart manager might have some market knowledge that hasn’t disseminated widely, but in the U.S. that kind of information gets spread around pretty quickly.

Indexes can be volatile and risky. If the stock market falls, an index tracking the stock market will fall. However, with the index fund you can rest in the knowledge you matched the market and didn’t do worse than most of the market.

If you really want a lesson, John Bogle, the inventor of the index mutual fund, explains why indexing is better than stock picking in “The Little Book of Common Sense Investing.” Essentially, Bogle says you can maximize returns and lower risk by not buying single stocks but mutual funds. Followers of Bogle have written a book called “BogleHeads” which expands on this theme.

Now in a shameless plug for myself, my book ETFs for the Long Run takes Bogle’s argument one step further. I agree with Bogle that indexing is the way to invest. Bogle likes the mutual fund structure, but I think Exchange Traded Funds are the mutual fund for the 21st century. In the book, I explain indexing, the advantages of buying mutual funds instead of single stocks and then why ETFs are better than mutual funds. The key reasons being they are cheaper, more tax efficient, more transparent and more flexible. I also explain how to buy and sell ETFs and how to use them to build a portfolio.

Since you don’t know what sector of the market will rise, you should own a broad market index, such as the Vanguard 500 mutual fund, (VFINX), or buy an ETF such as the SPDR, (SPY), or the iShares S&P 500 Index (IVV). The Diamonds Trust (DIA) tracks the Dow Jones Industrial Average and the PowerShares QQQ (QQQQ) follows the technology heavy Nasdaq 100 index. The Vanguard Total Bond Market (BND) is a broad bond index.

Then you break it down into sector specific indexes that you want to follow.

Finally, you need to watch fees. ETFs typically charge smaller expense ratios than mutual funds. However, if you are dollar cost averaging, which in this market is the only way to go, the ETF’s commission will significantly eat into your returns if you invest less than $1,000 a pop. If you are investing less than $1,000 a pop, then go with a no-load index fund. Buying an index fund with a load is like paying for your own security in a gated community. It’s a waste of money.