The Week's Best- and Worst-Performing Financial Funds

Exactly 10 years ago today, with a freshly minted MBA in hand, I was hired by this ratings agency as its banking and brokerage analyst. In honor of that event, I felt it appropriate to look back at that sector.

One constant theme of the industry has been consolidation. The quarterly Guide to Banks and Thrifts, our reference book on bank ratings, covered more than 11,000 institutions when I first worked on it in 1997. In the decade since, consolidation has helped dwindle that down to just more than 8,700.

Like a Russian matryoshka doll, today's financial funds are buying the stocks of global banks that gobbled up national banks that bought regional ones assembled from local banks. For the week ended June 14, 64 of these financial funds rose in share price, while only four fell. Excluding the one fund that shorts the financial stocks, this group rose an average of 1.45%.

With a one-week total return of 3.76%, the iShares Dow Jones US Broker Dealers Index Fund(IAI Quote) was buoyed by returns of 12.46% from optionsXpress Holdings(OXPS Quote), 12.18% from Investment Technology Group(ITG Quote), 11.69% from Nymex Holdings (NMX Quote) and 7.52% from Lehman Brothers(LEH Quote).

Comparing May 2007 to May 2006, optionsXpress announced that it added 22% more client accounts and 30% more client assets. Investment Technology Group is being pressured by its largest shareholder to buy back shares or sell the company.

Investors are betting on a bidding war between NYSE Euronext, Deutsche Boerse AG, and the Chicago Mercantile Exchange over Nymex. Seen as a bellwether for the industry, Lehman Brothers reported a record $1.27 billion in net income, which was 27% above the previous second quarter.

In second place, the 200% leveraged Ultra Financials ProShares (UYG Quote) gained back 3.43% for the week under review. However, since this ETF began trading on Feb. 1, 2007, the total return is -1.54%.

Another ETF doing well this week is KBW Capital Markets ETF (KCE Quote), which grew 3.20%. The fund's largest holdings are Morgan Stanley (MS Quote), Goldman Sachs (GS Quote), Merrill Lynch (MER Quote) and Lehman Brothers.

Goldman's announcement of $2.33 billion in net income for the quarter was an increase of just 1% from the same quarter the previous year. This disappointed shareholders and the stock only gained 2.59%.

This was not a good week to be short the financial sector. The UltraShort Financials ProShares (SKF Quote), a 200% negatively leveraged ETF, sank 2.99%. Since its inception on Feb. 1, 2007, the fund is off by 0.96%.

Another newcomer, the First Trust/Gallatin Specialty Finance and Financial Opportunities Fund (FGB Quote) is down 1.18% for the week ended June 14. But this closed-end fund is up 0.75% since inception on May 25, 2007.

Best Performing Financial Funds*
Fund	Ticker	Rating	Fund Type	1-Week Total Return
iShares Dow Jones US Broker Dealers Index Fund	IAI	B+	ETF	3.76%
Ultra Financials ProShares	UYG	U	ETF	3.43%
KBW Capital Markets ETF	KCE	B+	ETF	3.20%
Fidelity Select Brokerage & Investment Mgmt Portfolio	FSLBX	B	Open-End	2.56%
ProFunds Financials UltraSector ProFund	FNPIX	C	Open-End	2.49%
iShares Dow Jones US Financial Services Index Fund	IYG	C	ETF	2.20%
Wells Fargo Advantage Specialized Financial Services	SIFEX	D+	Open-End	2.20%
ProFunds Banks UltraSector ProFund	BKPIX	E+	Open-End	2.13%
Saratoga Advantage Trust/Financial Services Portfolio	SFPAX	D-	Open-End	2.10%
Schwab Financial Services Fund	SWFFX	C	Open-End	2.00%
*For the week ending June 14 U=Unrated Source: Bloomberg

Unlike the brokers riding high on renewed interest in the stock market, the bank holding companies are faced with slower growth in new loans, rising expenses and more loans going bad.

Large interest rate moves could force banks to pay more for deposits, squeezing or eliminating the net interest margin on existing fixed rate loans.

Edging lower by 0.65%, the (BTO Quote)John Hancock Bank and Thrift Opportunity Fund (BTO) holds 91.3% in banks, 4.8% in diversified financial services and 3.9% in savings and loans.

One of the fund's holdings, First Charter Corporation (FCTR Quote) fell 3.87% on the disclosure that it wrote 67 loans for properties in a real-estate development based on property appraisals that were inflated.

Lastly, the (BURKX Quote)Burnham Financial Services Fund (BURKX) just missed breaking even with a loss of 0.09%. The fund's shares in Opteum (OPX Quote) dove 13.21%. The stock has lost three quarters of its value since going public in 2004, and is now trying to exit the subprime mortgage origination business.

Over the next 10 years, I would not be surprised to see the number of banks in the United States drop below 7,000 as weaker banks get absorbed by stronger ones.

In the short run, the U.S. Congress is drafting consumer protection legislation for mortgage lenders.

By actively monitoring against fraudulent loan practices, the industry can work its way out of trouble and strengthen the asset quality on its balance sheets.

Worst Performing Financial Funds*
Fund	Ticker	Rating	Fund Type	1-Week Total Return
UltraShort Financials ProShares	SKF	U	ETF	-2.99%
First Trust/Gallatin Specialty Fin and Finl Opportunities	FGB	U	Closed-End	-1.18%
John Hancock Bank and Thrift Opportunity Fund	BTO	D+	Closed-End	-0.65%
Burnham Financial Services Fund	BURKX	E-	Open-End	-0.09%
FBR Small Cap Financial Fund	FBRSX	E-	Open-End	0.23%
Alpine Dynamic Financial Services Fund	ADFSX	U	Open-End	0.24%
Franklin Mutual Series Fund - Mutual Fin Services	TEFAX	B+	Open-End	0.25%
PowerShares Financial Preferred Portfolio	PGF	U	ETF	0.37%
RBB Senbanc Fund	SENBX	E+	Open-End	0.44%
First Financial Fund Inc	FF	E	Closed-End	0.50%
*For the week ending June 14 U=Unrated Source: Bloomberg