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Financial Funds Sell Off Ahead of GE

Over the last week, the market was quiet, perhaps too quiet. The Dow Jones Industrial Average, S&P 500 and Nasdaq-100 each fell less than 1%. Meanwhile, the financial funds we track were on the move, sliding an average of 3.52% for the five trading days ended Thursday, April 10.

The poor banking sector performance may have been a harbinger of trouble for General Electric's (GE - Get Report) finance unit. Just prior to the end of the first quarter, the financial industry credit seizure forced GE to lower the presumed value of some of its securities held and prevented the sale of other financial assets.

Ultra Financials ProShares (UYG - Get Report) tops the worst-performing list this week, losing 8.18%. When financial stocks are contracting in value, being 200% long the Dow Jones U.S. Financials Index is double trouble.

By Thursday, the fund's holding of The First Marblehead Corporation (FMD) hit an all-time low, plunging 42.80% for the period. This student loan securitization company suffered the loss after its bond guarantor filed for chapter 11 bankruptcy on Monday. As a result, First Marblehead's financing arrangement with Goldman Sachs (GS - Get Report) expired without completing a new $1 billion credit deal.

Another fund holding, America's third-largest mortgage insurer, Radian Group Inc (RDN - Get Report), sliced 21.76% off of its stock price after preemptively asking its lenders to waive the minimum credit rating covenant. Radian's record fourth-quarter loss of $721 million calls into question the company's ability to pay claims prompting downgrade worries.

The ProFunds Banks UltraSector ProFund (BKPIX) gave up 7.66%, while the KBW Regional Banking ETF (KRE) dove 6.97%. Three stock holdings common to both funds were Cathay General Bancorp (CATY), down 17.30%; Frontier Financial Corp (FTBK), down 17.19%; and Old National Bancorp (ONB - Get Report), down 16.21%. Investors are getting out ahead of expected first-quarter disclosures of rising loan defaults.

Worst Performing Financial Funds
Ranked by returns for the week ended April 10
Fund Ticker Rating Fund Type 1 Week Total Return
Ultra Financials ProShares UYG E- ETF -8.18%
ProFunds Banks UltraSector ProFund BKPIX E- Open-End -7.66%
KBW Regional Banking ETF KRE D- ETF -6.97%
John Hancock Bank and Thrift Opportunity Fund BTO D- Closed-End -6.83%
ProFunds Financials UltraSector ProFund FNPIX E- Open-End -6.25%
Morgan Stanley Financial Services Trust FSVAX E- Open-End -5.35%
Fidelity Select Banking Portfolio FSRBX E- Open-End -5.07%
Rydex Series - Banking Fund RYKAX E Open-End -4.94%
PowerShares Dynamic Banking Portfolio PJB D- ETF -4.94%
iShares Dow Jones US Financial Services Index Fund IYG D ETF -4.91%
Source: Bloomberg

For an explanation of our ratings, click here .

The only financial fund keeping its head above water this week is the UltraShort Financials ProShares (SKF). The fund added 8.61% by being 200% negatively leveraged to the members of the Dow Jones U.S. Financials Index.

Best-Performing Financial Funds
Ranked by returns for the week ended April 10
Fund Ticker Rating Fund Type 1 Week Total Return
UltraShort Financials ProShares SKF C ETF 8.61%
PowerShares Financial Preferred Portfolio PGF C ETF -0.09%
Burnham Financial Industries Fund BURFX B- Open-End -1.27%
PowerShares Dynamic Insurance Portfolio PIC D+ ETF -1.30%
First Trust/Gallatin Spec Fin and Finl Opportunities Fund FGB U Closed-End -1.45%
iShares Dow Jones US Insurance Index Fund IAK D ETF -1.53%
Alpine Dynamic Financial Services Fund ADFSX U Open-End -1.53%
Davis Financial Fund RPFGX D- Open-End -1.55%
KBW Insurance ETF KIE D- ETF -1.72%
John Hancock Financial Services Trust JEFSX D+ Open-End -1.87%
Source: Bloomberg

RealMoney Barometer Poll
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Kevin Baker became the senior financial analyst for TSC Ratings upon the August 2006 acquisition of Weiss Ratings by, covering mutual funds. He joined the Weiss Group in 1997 as a banking and brokerage analyst. In 1999, he created the Weiss Group's first ratings to gauge the level of risk in U.S. equities. Baker received a B.S. degree in management from Rensselaer Polytechnic Institute and an M.B.A. with a finance specialization from Nova Southeastern University.

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