In an attempt to ensure that US financial institutions are financially stable, the Federal Reserve recently announced a new round of stress tests, influencing the Financial Select Sector SPDR Fund (NYSE:XLF), the iShares Dow Jones US Financial Sector Index Fund (NYSE:IYF) and the Vanguard Financials ETF (NYSE:VFH).
These tests are expected to prove a financial institutions ability to withstand another economic recession, in that they would illustrate enough capital reserves to absorb potential losses over the next two years. As a result of this, large financial institutions that are overseen by the Federal Reserve, like Bank of America (NYSE:BAC), Wells Fargo (NYSE:WFC), JP Morgan Chase & Co. (NYSE:JPM) and Citigroup, Inc. (NYSE:C) will likely have to fore-go significant increases in dividend payments to shareholders to keep cash on their balance sheets.
At the end of the day, these stress tests are being used to ensure that the large financial institutions have enough capital to absorb the anticipated wave of foreclosure losses and the fees that are likely to come along with them over the next 24 months and are being put in place to prevent a catastrophic financial meltdown.
As mentioned above three ETFs which are heavily allocations to financial institutions that will be influenced by the new stress test include:
- Select Sector SPDR Fund (NYSE:XLF), which allocates more than 54% of all assets to its top 10 holdings which include JP Morgan Chase (NYSE:JPM), Wells Fargo (NYSE:WFC) and Bank of America (NYSE:BAC).
- iShares Dow Jones US Financial Sector Index Fund (NYSE:IYF), which allocates more than 40% of its assets to its top 10 holdings which include JP Morgan Chase (NYSE:JPM), Citigroup (NYSE:C), Bank of America (NYSE:BAC) and Wells Fargo (NYSE:WFC).
- Vanguard Financials ETF (NYSE:VFH), which allocates more than 42% of its assets to its top 10 holdings which also include JP Morgan Chase (NYSE:JPM), Bank of America (NYSE:BAC), Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC).
Written By Kevin Grewal From ETF Tutor Disclosure: No Positions
Kevin Grewal is the founder, editor and publisher of ETF Tutor and serves as the editor at www.SmartStops.net, where he focuses on mitigating risk and implementing exit strategies to preserve equity. Additionally, he is the editor at The ETF Institute, which is the only independent organization providing financial professionals with certification, education, and training pertaining to exchange-traded funds (ETFs). Prior to this, Grewal was a quantitative analyst at a small hedge fund where he constructed portfolios dealing with stock lending, exchange-traded funds, arbitrage mechanisms and alternative investments. He is an expert at dealing with ETFs and holds a bachelor’s degree from the University of California along with a MBA from the California State University, Fullerton. He is a contributing author on The Street – his articles can also be found published on various sites including Yahoo! Finance, The Globe and Mail , Daily Markets, MSN Money, Seeking Alpha, Fidelity Investments, Traders Library, and Minyanville.