Fed Can't Stop the Bleeding in Financials Funds

Most financial funds are still down, with an average performance of negative 3.82%.

Author:: Richard Widows
Publish date:: Dec 14, 2007 2:23 PM EST

Anyone who thinks the Federal Reserve has been cutting interest rates to bail out financial services companies hasn't been paying attention to stock prices in that sector recently.

On Tuesday the Fed threw the badly wounded financial industry a Band-Aid by cutting the fed funds target rate by 0.25 percentage points to 4.25%, only to see the financials stocks sell off even further. The carnage was so bad that the following day the Fed announced a coordinated program with other central banks to add liquidity to the banking sector.

These efforts didn't prevent the shares of

Citigroup

from falling 4.4% on Tuesday and another 5.3% on Wednesday. The nation's largest bank, which traded as high as $57 a share less than a year ago, closed on Dec. 13 at $31.01, down 9.72% for the week and off 44.3% for the year to date.

Citi had plenty of company in the loss column.

Washington Mutual

(WM) - Get Report

tumbled 18.51% for the week while

National City

(NCC)

swooned 12.07%. The already-battered mortgage industry continued to retreat, with

Countrywide Financial

(CFC)

falling 16.69% and

MGIC Investment

(MTG) - Get Report

down 12.23%.

Mortgage industry giants

Fannie Mae

and

Freddie Mac

both suffered double-digit percentage setbacks.

Fears that the credit crunch could spread to other areas of the money-lending business drove prices lower in the consumer finance sector.

SLM

(SLM) - Get Report

, also known as Sallie Mae, took a 25.05% hammering, while

First Marblehead

sank 20.32% and

IndyMac

(IMB)

surrendered 18.01%.

The Dow Jones financials index retreated 5.05% for the period, led southward by an 11.20% setback in the mortgage finance subindex, an 8.77% decline in the consumer finance group, a 6.40% backtracking in the banking gauge and a 7.09% retrogression in full-line insurance.

Of 60 financial services funds -- including open-end mutual funds, closed-end funds and exchange-traded funds but excluding leveraged and inverse funds as well as redundant classes of multiclass funds -- the average performance for the week ended Dec. 13 was negative 3.82%.

The bottom trio of performers -- one of which suffered a double-digit setback for the week -- all are leveraged funds. Investors who took positions in those funds in hopes of achieving outsized gains are now learning that multiplicative nature of geared investments can also produce extra painful losses.

ProShares Ultra Financials

(UYG) - Get Report

, an exchange-traded fund that seeks to reproduce twice the daily performance of the Dow Jones Financials Index, slid 11.19%.

(BKPIX) - Get Report

ProFunds Bank Ultra Sector (BKPIX), which tracks 150% of the Dow Jones U.S. Bank Index, lost 9.61%, and

(FNPIX) - Get Report

ProFunds Financial Ultra Sector (FNPIX), which tracks 150% of the Dow Jones U.S. Financials Index, lost 7.69%.

Fourth from the bottom was the

KBW Regional Banking ETF

(KRE) - Get Report

, which gave up 6.93%. It's largest holdings include

Hudson City Bancorp

(HCBK)

SVB Financial

(SIVB) - Get Report

and

Commerce Bankshares

(CBSH) - Get Report

For a description of our ratings, click

here.

Only three financial services funds finished the week ended Dec. 13 with performances prefaced by plus signs, and two of them were inverse funds whose prices move opposite the trend in share prices.

ProShares Ultra Short Financials

(SKF) - Get Report

, an ETF that seeks to reproduce twice the inverse performance of the Dow Jones Financials Index, gained 9.84%.

Coming in second was

(RTPQX)

ProFunds Rising Rates Opp 10 (RTPQX), an open-end fund designed to move up when interest rates fall. This fund seeks daily investment results, before fees and expenses, that correspond to the inverse of the daily price movement of the most recently issued 10-year U.S. Treasury note. It rose 1.23%.

WisdomTree International Financial

(DRF)

, the third-best performer, held its head above water with a gain of 0.17%. The ETF's top holdings are

HSBC

(HSB)

and Banco Santander Intesa Sanpaolo.

For a description of our ratings, click

here.

Richard Widows is a financial analyst for TheStreet.com Ratings. Prior to joining TheStreet.com, Widows was senior product manager for quantitative analytics at Thomson Financial. After receiving an M.B.A. from Santa Clara University in California, his career included development of investment information systems at data firms, including the Lipper division of Reuters. His international experience includes assignments in the U.K. and East Asia.