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Financial Funds Rally on Banks' Results

Financial funds were the top performers among industry groups, as banks reported better-than-expected results.
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TSC Ratings provides exclusive stock, ETF and mutual fund ratings and commentary based on award-winning, proprietary tools. Its "safety first" approach to investing aims to reduce risk while seeking solid outperformance on a total return basis.

Financial-services funds rallied this week as banks including




Goldman Sachs


reported better-than-expected quarterly results, helping company shares rebound from declines of as much as 90%.

The stalling of so-called cram-down legislation in the U.S. Senate may help banks extend gains. The law would enable bankruptcy judges to rewrite all aspects of a troubled loan. Without sufficient votes, the cram-down may be watered down to cover fewer loans or given an early sunset date if a compromise can be reached at all.

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For the five trading days through Thursday, the average financial-sector fund we track gained 2.5%, excluding inverse funds that sell short banks, real estate investment trusts, insurance companies and brokerage firms. It was the best-performing industry group.

Citigroup, up 32% in the five days, recorded a first-quarter profit of $1.6 billion. Ironically, the same mark-to-market accounting philosophy forcing banks to take losses on securities held required Citigroup to book $2.5 billion in unrealized gains on the drop in market value of its own outstanding debt. Goldman Sachs had better-than- expected earnings as a surge in trading revenue outweighed asset writedowns.

The best-performing financial fund this week is the

First Trust Financial AlphaDEX Fund


, gaining 8.6%. On top of Citigroup, other holdings include

E*Trade Financial


, up 69%;

Huntington Banchares/OH


, up 54%; and

Protective Life


, up 19%.

Bank of America


added 8.3% for the week. Bank of America is expected by analysts to report stronger lending from its Countrywide Financial unit when it reports first-quarter earnings on April 20.

The only top-performing financial fund listed below rated as a "buy" is the

Jennison Financial Services Fund


, benefiting from an international mix of financial institutions. Top-name holdings include



, up 13%;

BNP Paribas


, up 9.5%;



, up 6.2%; and

Toronto-Dominion Bank


, up 4.8%.

Stress-test results to be reported on May 5 are designed to add confidence to the banking system. This should increase bullish sentiment for the sector going forward.

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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.