What’s Next For Battered Financial ETFs?

It’s been a strong month for the financial sector and its exchange traded funds (ETFs), giving the heavily bruised sector a much-needed roar.

Since the March 9 low, financials have rebounded more than 25%.  Consider the Financial Select SPDR (XLF), which has exploded from its close on March 9 at $6.26, gaining 34%.  To make it even sweeter, the ETF has crossed its 50-day moving average, despite being down 41.3% year to date.

Unfortunately, the financials aren’t in the clear.  The story behind the credit markets is completely different than that of the stock market.  In fact, investors have been taking out additional insurance against the possibility of defaults in the banking stocks, states David Gaffen of The Wall Street Journal.

Additionally, corporate bond yields suggest an elevated concern. Barclays Capital’s index of banking bonds has touched 6.67% over comparable Treasuries. Spreads widened at alarming rates at the early part of the month in worries that the banking sector would take a further blow.

The federal government has stepped up to help the ailing industry with its public-private investment plan, which will allow banks to sell their toxic assets.

Only time will tell if this plan will suffice and if the banks will truly be able to get rid of their unwanted assets without impairing capital.

Kevin Grewal contributed to this article.

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