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Financial Services ETFs
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About Financial Services ETFs |
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Financial Services ETFs Overview and forecast
The Financial Services ETFs have had the problem of being right in the middle of the worst affected part of the financial industry as a result of the US economic meltdown, and have also been hit by the credit crunch. The Financial Services ETFs have reflected the trauma to the industry, and their returns have suffered.
The Financial Services ETFs models also naturally took a battering because of their unavoidable links to stocks and indices which were on the receiving end of huge markdowns by the markets. Their holdings contained a lot of the big financial institutions, and those stocks went into freefall.
Ironically, the crash would have done good business for some investors and traders. If you scroll through our charts, you'll see a range of jagged spikes and upturns, even during the crash, throughout 2008, where the Financial Services ETFs were producing good price margins, and huge volumes of trade. These are popular trading stocks, and from the look of the charts, day traders were very active during the crash.
The Financial Services ETFs have undergone a big cultural shift since 2008. They're mostly older ETFS. They were originally the standard model ETFs, barely traded at all, and their unit prices were very high. By late 2007, they started to trade in much higher volumes, and by the peak of the crash were trading in record volumes. ETFs that had previously traded in less than 100,000 units were trading in volumes of millions. This drastic cultural change has been a survival strategy for traders, and has permanently changed the face of the ETF paradigm.
Short term (6 months)
The Financial Services ETFs were the leaders of the original ETF concept, even if they weren't the first. They were supposed to be big, unsinkable, investment vehicles. For traders, that wasn't a great trading model, and unit prices of $100 were definitely not fast movers. As it happened, the old model wasn't a great market asset, either. When the crash happened, that model went straight out the window, and that's produced a lot of trade, more trade in a year, in some cases, than in nearly a decade.
Lower price levels have created good price upsides which many of the old models simply didn't have. Hence the much higher volumes, and in some cases, trader fueled revivals in prices. The second quarter of 2009 is starting to look like a benchmark between the old regime and the new. Sustained price rises in the Financial Services ETFs are producing very good trading values, as much as $20 a unit, in some The Financial Services ETFs.
That's good news for the market as a whole, because it means the big capital is active, and making money. The irony of investment products based on the stock market doing better than the market itself won't be lost on anyone, but the fact is that ETFs, being spreads, have strengths individual stocks can't have. That means that the short term for the Financial Services ETFs is potentially very strong indeed. There are no guarantees, obviously, of continued price surges, but the trading indicates that these are profitable ETFs in most cases, when viewed as traders.
Medium term (2 years)
The medium term isn't too clear for the financial services industry as a whole, let alone individual ETFs. The industry will have to recover from the crash, and investors have been severe in punishing prices for underperforming stocks. Some stocks have been hit harder than others, and that, inevitably, throws off the returns for the Financial Services ETFs over time. As you can see from our charts, if the 6 month periods are looking OK, the 12 month periods are still looking pretty grim.
A cautious prediction of a continuing upside is possible, however, based on continued volumes of trading and a general sector move of prices upwards. That is a natural result of high volume trading in a generally rising market, and if it's unlikely that it will be a smooth ride, the fundamental movement is upwards.
Long term (5 years)
The financial sector isn't like other sectors. It leads market movements, and it retains a faithful core of traders. Many of the stocks are in the so called too big to fail category, and they do generate very strong returns in normal markets. In 5 years, the markets will have stabilized to the extent of doing consistent levels of business, and the credit crunch will be either over or well on its way out.
In bull markets the financial services stocks are major traders as well as major money makers for investors. The very atypical situation created by the combination of factors which led to the meltdown is unlikely to reemerge, and a few years of business should see a consolidated upswing over the long term, even if it may seem like that takes a long time to happen.
Qualifiers to projections
The financial sector is not a place for facile assessments of anything. That was one of the causes of the meltdown. The Financial Services ETFs are very much products of their indices, and the reality is that some of these ETFs took hits up to 85% of their value in the 12 month period. Their overall recovery has been good in the first half of 2009, but nobody's pretending that the problems are settled, or that there aren't more potentially stormy moments to come.
This is a highly complex market, and it's one of the most sensitive of all the ETF sectors. Price moves tend to be much more sudden, and far sharper, in both directions. The Financial Services ETFs handle some of the biggest, best performing stocks in history, and the simple fact is that caution, particularly in terms of expectations, is very strongly advised. This market has proven that the bottom can drop out spectacularly, and that it reacts violently to negative sentiment. Investors are advised to check out thoroughly the asset mixes of the Financial Services ETFs before making any decisions.
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Last Updated on: 2010-01-14 02:03:40 |
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