Financial Sector ETFs: Still Dealing With ‘Troubled’ Assets

The financial sector, along with related exchange traded funds (ETFs), are not out of the woods yet. Banks are still sifting through troubled loans and some ended up on the chopping block.

Financial exchange traded funds (ETFs) have gained more than 100% off the March 9 market low, but the Federal Deposit Insurance Corporation (FDIC) reported that banks lost $3.7 billion in the second quarter in bad loans made to homebuilders, commercial real estate developers and small- and mid-size businesses, reports Eric Dash for The New York Times.

Deposit insurance fund dropped to $10.4 billion, a 16-year low. “Problem banks” have increased from 305 in the first quarter to 416. The decline in deposit insurance comes from money set aside to cover bank failures, but the reserves are so low that officials are considering a special assessment on banks, not counting elevated insurance fees, by the end of the third quarter.

Banks have cut out $48.9 billion, or 2.6% of assets, most of it tied to rising corporate and commercial real estate losses as well as write-offs on short-term debt and a jump in troubled credit card loans. Early trend signs show that quarterly increases in loan losses are slowing.

Federal bank regulators are anticipating hundreds of small- and medium-size banks to collapse in the coming months, and more money is being used to prevent losses. Federal officials warned the sector that a rebound won’t come soon and analysts say a recovery will come when the job market and broader economy stabilize.

• iShares Dow Jones U.S. Financial Services (IYG): up 18.7% year-to-date

• SPDR Financial Select Sector (XLF): up 19.4% year-to-date

• Regional Bank HOLDRs (RKH): up 5.7% year-to-date

Subscribe by RSS Subscribe by Email