The Goldman Sachs Drama Sends Financial ETFs All Over The Map

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April 18, 2010 11:30am NYSE:FAZ NYSE:XLF

“Investors had expected this week to be all about earnings reports. And for the first four days it was, with several bellwether firms reporting first quarter results that ranged from disappointing

 Google (NASDAQ: GOOG) to impressive Intel (NASDAQ: INTC). But the earnings season successes and failures were overshadowed on Friday morning when the Securities & Exchange Commission charged Goldman Sachs (NYSE: GS) and one of its vice presidents with defrauding investors by misstating and omitting critical facts about products tied to subprime mortgages,” Michael Johnston Reports From ETF Database.

Johnston goes on to report, “The SEC stated that Goldman (NYSE: GS) created and marketed a synthetic collateralized debt obligation that was tied to the performance of sub prime mortgage-backed securities in 2007, just as the U.S. housing market was beginning to show early signs of collapsing. At the heart of the complaint is the role that hedge fund Paulson & Co. played in selecting the portfolio while maintaining a short position against the CDO.” “Undisclosed in the marketing materials and unbeknownst to investors, a large hedge fund, Paulson & Co. Inc. [“Paulson”], with economic interests directly adverse to investors in the [CDO], played a significant role in the portfolio selection process,” the complaint said.”

As a result of the Goldman Sachs charges, the Financial Select Sector SPDR ETF (NYSE: XLF) and the Direxion Daily Financial Bear 3x ETF (NYSE: FAZ) zipped in two different directions.  See below:

“The Financial Select Sector SPDR Fund (NYSE: XLF) was the most active exchange-traded fund by share volume on Friday after the Securities and Exchange Commission announced fraud charges against Goldman Sachs Group Inc. (NYSE: GS) in a case related to its alleged role in structuring and marketing a collateralized debt obligation. The financial-sector fund saw volume of nearly 350 million shares late Friday. The SPDR S&P 500 ETF (NYSE: SPY) , which is almost always the most active ETF, had volume of about 310 million shares, according to FactSet Research. The Financial Select Sector SPDR Fund (XLF), which counts Goldman (GS) as its fifth-largest holding, was down 3.5% in recent action. Goldman shares lost nearly 13%,” John Spence Reports From MarketWatch.

“An exchange-traded fund under the ticker “(NYSE: FAZ)” that moves in the opposite direction of financial stocks — and then multiplies that performance times 3 — rallied nearly 10% Friday, the biggest one-day gain since early February. Financial stocks fell sharply after the Securities and Exchange Commission announced charges against Goldman Sachs Group Inc.(NYSE: GS). Volume in the Direxion Daily Financial Bear 3x Shares (NYSE: FAZ) which aims to give the opposite results of the Russell 1000 financial services index, surged to 188 million shares,” Laura Mandaro Reports From MarketWatch.

Here are some more details we put together on the two ETFs below:

The Financial Select Sector SPDR® Fund (NYSE: XLF), before expenses, seeks to closely match the returns and characteristics of the Financial Select Sector Index (ticker: IXM). Our approach is designed to provide portfolios with low portfolio turnover, accurate tracking, and lower costs.

Fund Top Holdings
As of04/15/2010
Name Weight Shares Held
Bank Of America Corporation (BAC) 10.52% 42,108,130
Jpmorgan Chase & Co (JPM) 10.23% 16,677,022
Wells Fargo & Co New (WFC) 9.35% 21,745,656
Berkshire Hathaway Inc Del 7.13% 6,946,055
Goldman Sachs Group Inc (GS) 5.22% 2,209,109
Citigroup Inc (C) 5.09% 82,474,990
American Express Co (AXP) 3.01% 5,024,790
Us Bancorp Del (USB) 2.91% 8,031,422
Morgan Stanley (MS) 2.32% 5,867,117
Bank Of New York Mellon Cor (BK) 2.08% 5,073,160

Chart for Financial Select Sector SPDR (XLF)

Fund Objective

The Financial Bear 3X Shares (FAZ) seeks daily investment results, before fees and expenses, of 300% of the inverse (or opposite) of the price performance of the Russell 1000® Financial Services Index (“Financial Index”). There is no guarantee the fund will meet its stated investment objective.

Target Index

The Russell 1000® Financial Services Index is a capitalization-weighted index of companies that provide financial services. As of April 30, 2008, the Index had 227 components, derived from the Russell 1000 Index with an average market capitalization of over $11 billion dollars and a median market capitalization of $4.4 billion dollars. One cannot directly invest in an Index.

Index Sector Weightings

Banks: Diversified 24.49%
Diversified Financial Services 23.84%
Real Estate Invt. Trusts (REITS) 11.59%
Financial Data & Systems 9.67%
Insurance: Property-Casualty 8.00%
Asset Mgmt. & Custodian  6.02%
Insurance: Multi-Line 5.68%
Insurance: Life 4.30%
Securities Brokerage & Svcs 3.95%
Banks: Svgs/Thrifts & Mort Lend 1.46%
Real Estate 0.57%
Consumer Lending 0.42%

Chart for Direxion Daily Financial Bear 3X Shares (FAZ)

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