Important Updates for Investors
Carla Pasternak's Premiere Issue of High-Yield International Just
Released
Income expert Carla Pasternak's debut issue of High-Yield
International covers a Taiwanese manufacturer yielding 9.5%... a
rare Mexican monopoly yielding 13.4%... and other top-performing
investments yielding up to 19.0%.
Government's Biofuel Timetable Could Spell +15,900% Growth
+15,900% growth might seem far-fetched... but it's not. In fact, it
is mandated by law. And I've identified the ONLY stock positioned to
capture this growth.
The
Silver Lining to a Falling Dollar
Despite the U.S. national debt, there is a silver lining for income
investors. This massive spending, combined with movement out of U.S.
Treasuries, is going to take its toll on the dollar, and
international income investors could reap the rewards in the form of
higher dividends. |
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| ETF
Spotlight -- Financial SPDR (XLF) |
Published: May 17, 2004
The Financial Sector SPDR (symbol XLF) is an
exchange-traded fund that tracks the performance of the S&P's
financial sector index. This index is comprised of 84 financial services
companies, with the heaviest weightings in commercial banks (29%),
insurance companies (21%), capital markets (18%) and thrifts/mortgage
finance (9%).
The top ten holdings comprise just over half of the value of the fund
(50.7%). The largest holding is banking and brokerage giant Citigroup
(C, $45.65, 11.4%), followed by leading insurance player American
International Group (AIG, $70.80, 8.9%) and national banking powerhouse
Bank of America (BAC, $80.20, 7.9%). Four of the fund's five largest
holdings are commercial banks (although Citigroup and Bank of America
have considerable brokerage and investment banking businesses), with
banks and brokerages accounting for eight of the ten largest companies.
Although many of these firm are considered to be interest rate
sensitive, XLF's correlation to the bond market is actually negative
(much like the rest of the stock market). Note that historically,
correlations between stocks and bonds have moved back and forth between
positive and negative. The increasing ease of shifting funds into and
out of various asset classes has apparently changed this behavior, as
money now flows much more quickly into the investment class where
near-term profits appear most likely. Therefore, stocks in the financial
sector have a lower correlation to the bond market now than they did in
the past.
Many of XLF's component stocks pay quarterly dividends. Based on recent
prices and dividends paid in the twelve months ending May 2004, the
fund's dividend yield is a respectable +2.0%. This yield can help smooth
losses during a market downturn. However, brokerage stocks can be
especially volatile during declines due to their low price-to-book
ratios.
On the whole, financial stocks outperformed the
S&P 500 during the 2000-2003 stock market meltdown, losing only
about -40% from top to bottom. After rallying strongly last year,
financial issues have fallen considerably in recent months. This should
not come as a surprise, as this sector tends to underperform in a rising
rate environment. Remember, not only do higher interest rates ultimately
slow the economy, but as rates at shorter maturities rise, bank profit
margins also tend to decline. After all, banks make their money on the
spread between borrowing and lending rates, and the majority of their
borrowing comes in the form of short-term liabilities (deposits). Banks
perform worst when the yield curve inverts, which tends to happen when
Wall Street expects a recession.
As of May 2004, the yield curve was still relatively steep -- rates were
much higher for longer maturities than shorter maturities. However, that
trend is now changing to a flatter curve, which tends to pressure
financial company profit margins.
| Financial
SPDR (XLF) |
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| Type: |
Sector Fund |
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| Similar funds: |
Dow
DIAMONDS (DIA) |
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Russell
1000 Value (IWD) |
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| Options?: |
Yes, Illiquid |
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| Performance
Data |
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| 52-week High: |
$30.61 |
3/5/2004 |
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Annualized
return since: |
| 52-week Low: |
$23.16 |
5/20/2003 |
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One-year |
19.26% |
| YTD Return: |
-0.89% |
(as
of 5/14/2004) |
Three-year |
1.58% |
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Five-year |
2.40% |
| Dividends: |
$0.55 |
past
12-mos |
Life of fund* |
4.46% |
| Expense Ratio: |
0.28% |
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*
- Started trading 12/22/1998 |
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| Correlation
Data* |
(1/02/02-4/30/04) |
Holdings* |
(as of
5/13/2004) |
| Dow
Jones Industrials |
90.6% |
|
Citigroup
(C) |
11.36% |
| S&P 500 |
|
93.2% |
|
Amer.
Intl. Group (AIG) |
8.89% |
| Nasdaq
Composite |
80.4% |
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Bank of
America (BAC) |
7.86% |
| Nasdaq-100 |
|
76.6% |
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Wells
Fargo (WFC) |
4.56% |
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JP
Morgan Chase (JPM) |
3.53% |
| DIA |
|
89.1% |
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Fannie Mae (FNM) |
3.28% |
| IWD |
|
92.2% |
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Amer.
Express (AXP) |
2.99% |
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Wachovia
(WB) |
2.88% |
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Morgan
Stanley (MWD) |
2.77% |
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Merrill Lynch (MER) |
2.57% |
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*
Percent top ten are of total |
50.69% |
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| Average
Daily Volume |
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Average
Daily Price Range |
| Apr-04 |
5,424,933 |
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Apr-04 |
1.6% |
| 2004 YTD |
3,635,925 |
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2004 YTD |
1.3% |
| 2003 |
2,168,775 |
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2003 |
1.7% |
| *
- Correlation measures how closely the two items track each
other |
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*
Includes prior day's close (true range) |
HOW TO MAKE MONEY IN XLF THIS
YEAR
If XLF is going to rally, then now is the time. As I write this, the
Financial SPDR is well off its weekly low and may put in a bullish
candlestick pattern. Although the fund remains in a bearish weekly MACD
crossover, it came within about 3% of the 38.2% retracement of the whole
bull market rally. That is a substantial sell-off in just two months.
The strong volume last week is bullish as well. Look for XLF to make an
attempt to retest its previous highs, although a new high is no
guarantee. In addition, my expectation for a bear market later this year
means that traders should look to sell this fund short as it approaches
its prior highs.
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