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Reform Fails to Slow Financial ETFs

By Gary Gordon of ETF Expert

What was the goal of financial-regulatory reform? Presumably, to increase oversight over Wall Street traders and reduce excessive risk-taking by proprietary trading desks.

Yet, Charlie Gasparino for reports that Goldman Sachs (GS - Get Report) is already ahead of the curve. In less than two weeks since a $550 million settlement with the Securities and Exchange Commission, Goldman has moved half of its stock-trading operations to its asset-management division.

Why? Instead of taking risky market positions with company capital and operating as a separate trading entity within the larger corporation, traders working as part of a client-centered, asset-management group can take similar market risks. In other words, Goldman might simply need to label its investment activity as "customer-related" to trade as it sees fit.

Similar moves appear to be under way at Bank of America (BAC - Get Report), Gasparino reported. Why Bank of America? The firm picked up investment bank Merrill Lynch (MER) in 2008.

It's not clear whether the capital-markets subsector of financial services will benefit from the shift. Since the regulations effectively passed both houses of Congress, two of three stock exchange traded funds with the most capital-markets exposure have gained handsomely, although this can also be attributed to less legislative uncertainty as well as a broader stock-market rally.

That said, a lot of smart folks seem to think Goldman Sachs (and Bank of America and JPMorgan (JPM - Get Report), et al.) will turn the new rules to their advantage. Investors will certainly want to keep an eye on financial-services ETFs that have made gains since the bill passed.

Among those ETFs are iShares Broker Dealers (IAI), which is up 2.8% (although sibling iShares Financial Services (IYG) is at negative 0.2%); KBW Capital Markets (KCE), also up 2.8%; and S&P 500 SPDR Trust (SPY), up 1.7%.


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ETF Expert, its parent company and clients may hold positions in the ETFs, mutual funds and index funds mentioned. The company receives advertising compensation from Invesco PowerShares Capital Management and Geary Advisors. The commentary does not constitute individualized investment advice. The opinions offered are not personalized recommendations to buy, sell or hold securities.

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