Deciphering July's Financial ETF Rebound

Wall Street is one of the few places on earth where transitioning from "horrible" to just plain "awful" can translate into a tidy profit, a phenomenon discovered in July by investors in exchange-traded funds that focus on the financial sector.

Federal Reserve efforts to save the banking industry, the rescue of Fannie Mae(FNM) and Freddie Mac(FRE) and legislation to ease the subprime-inspired credit crunch all combined to restore a modicum of confidence in financial stocks and ETFs.

In July, as the market finished fractionally below where it started the month, five of the dozen financial sector ETFs in the accompanying table rebounded to double-digit percentage gains.

All of the 12 funds on the table, however, are down for the most recent three-month and year-to-date stretches. Except for one of the funds, all have suffered losses well into the double digits for the last three months and the year to date.

Interestingly, three of the five double-digit gainers on the list incorporate "regional" banking in their respective names, although banking firms seem to be stretching the scope of that term. For example, July's top-performing financial ETF, HOLDRs Regional Bank(RKH), which spurted 16.72% during the month, includes among its top holdings US Bancorp(USB), JPMorgan Chase(JPM), Wells Fargo(WFC) and Wachovia(WF).

The second-best financial ETF for July, KBW Bank ETF(KBE), which rebounded 13.75% for the month but remains off 23.40% for the year to date, lists top holdings Bank of America(BAC) and Citigroup(C), in addition to Wells Fargo and JPMorgan Chase.

Double-digit gainer PowerShares Dynamic Banking Portfolio spurted 11.65% in July and remains the lone fund in the group behind by only single-digit percentages -- 4.62% and 2.66%, respectively -- for the most recent three months and year to date.

Regional banks also dominate its top holdings, which include New York Community Bancorp(NYB) and UnionBanCal(UB), in addition to JPMorgan Chase, US Bancorp and Wells Fargo.

The group's one-month bounce, however, was not enough to pull TheStreet.com Ratings grades for the financial ETFs on the list up to "buy" or even "hold" territory. As of early August, every fund on the table is marked in the "D" or "E" range, both of which equate with "sell" recommendations.

Investors are advised to consider carefully before believing a one-month rebound is the beginning of a long-term trend.

BANK SHOT: FINANCIAL ETFs REBOUNDED STRONGLY IN JULY
NAME, TICKER & TheStreet.com RATINGS GRADE	1-MO. TOTAL RET'N (%)	3-MO. TOTAL RET'N (%)	YR.-TO-DATE TOTAL RET'N (%)	INCEPTION DATE
Financial Select Sector SPDR (XLF) D	6.76	-17.98	-23.99	12/14/1998
First Trust Financial AlphaDEX (FXO) E	4.25	-12.90	-20.07	5/10/2007
HOLDRS Regional Bank (RKH) D+	16.72	-13.86	-17.43	6/26/2000
iShares DJ US Regional Banks (IAT) D-	11.64	-17.18	-19.50	5/1/2006
iShares Dow Jones US Financial Sect (IYF) D+	6.47	-16.09	-22.29	5/22/2000
iShares Dow Jones US Financial Serv (IYG) D	9.72	-17.64	-24.70	6/12/2000
KBW Bank ETF (KBE) D-	13.75	-18.99	-23.40	11/8/2005
KBW Regional Banking ETF (KRE) D-	13.67	-11.58	-17.89	6/22/2006
PowerShares Dynamic Banking Portf (PJB) D	11.65	-4.62	-2.66	10/12/2006
PowerShares FTSE RAFI Financials (PRFF) D-	6.72	-20.10	-26.35	9/20/2006
ProShares Ultra Financials (UYG) E	8.19	-33.95	-47.17	1/30/2007
Vanguard Financials ETF (VFH) D+	7.60	-14.97	-21.26	1/26/2004
S&P 500 Total Return Index	-0.90	-7.80	-12.39
Data as of 7/31/2008. Source: TheStreet.com Ratings & Bloomberg For an explanation of our ratings, click here.

Disclosure note: The author holds a position the Vanguard Financial ETF(VFH), which appears in the table accompanying this article.

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