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Congress' Financial Overhaul and ETFs

NEW YORK (TheStreet) -- After the Senate's passage last week of the largest financial overhaul since the Great Depression, investors may be wondering how the legislation will affect ETFs such as Financial Select SPDR (XLF) and how they can position their portfolios to benefit from the new legislation.

Although the 1,500-page bill passed by the Senate still needs to be reconciled with a House bill passed in December, there are already many aspects of the two bills that are similar, and these measures can be counted on to end up in the final package.

For one, both the Senate and House versions of the bill include greater protection for consumers from credit card issuers through a new consumer protection agency. In the Senate's version of the bill, the agency will exist within the Federal Reserve, whereas in the House's version, the agency will operate independently. In either case, however, the agency will exist, and limitations will be placed on credit and debit card issuers.

Although some expect card issuers to pass the expected higher costs on to businesses instead of consumers, this would still lead to less credit card usage and lower profits for card companies.

Beyond the familiar names we see daily on cards and in stores such as Visa (V) and American Express (AXP), many large banks, such as Bank of America (BAC) and Citigroup (C) also issue debit cards. These companies will see their pricing power diminished, and this could bite into their earnings.

An ETF with a large amount of exposure to these types of consumer credit companies is the Dow Jones U.S. Financial Services Index Fund (IYG). Bank of America, Citigroup, American Express and Visa account for 24.5% of the ETF's holdings.

This means that among financial ETFs right now, IYG is not an ideal choice.

On another issue, the Senate's version of the bill would not allow banks to engage in proprietary trading. Since this was something proposed by President Obama in January, after the House bill had been passed, it is not included in the House version of the bill. But it could wind up in the final merged legislation.

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