The Week's Best- and Worst-Performing Financial Funds - TheStreet

The Week's Best- and Worst-Performing Financial Funds

Ongoing bank consolidation has fueled strong gains in this sector.
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Exactly 10 years ago today, with a freshly minted MBA in hand, I was hired by this ratings agency as its banking and brokerage analyst. In honor of that event, I felt it appropriate to look back at that sector.

One constant theme of the industry has been consolidation. The quarterly

Guide to Banks and Thrifts

, our reference book on bank ratings, covered more than 11,000 institutions when I first worked on it in 1997. In the decade since, consolidation has helped dwindle that down to just more than 8,700.

Like a Russian matryoshka doll, today's financial funds are buying the stocks of global banks that gobbled up national banks that bought regional ones assembled from local banks. For the week ended June 14, 64 of these financial funds rose in share price, while only four fell. Excluding the one fund that shorts the financial stocks, this group rose an average of 1.45%.

With a one-week total return of 3.76%, the

iShares Dow Jones US Broker Dealers Index Fund

(IAI) - Get Report

was buoyed by returns of 12.46% from

optionsXpress Holdings


, 12.18% from

Investment Technology Group


, 11.69% from

Nymex Holdings


and 7.52% from

Lehman Brothers



Comparing May 2007 to May 2006, optionsXpress announced that it added 22% more client accounts and 30% more client assets. Investment Technology Group is being pressured by its largest shareholder to buy back shares or sell the company.

Investors are betting on a bidding war between NYSE Euronext, Deutsche Boerse AG, and the Chicago Mercantile Exchange over Nymex. Seen as a bellwether for the industry, Lehman Brothers reported a record $1.27 billion in net income, which was 27% above the previous second quarter.

In second place, the 200% leveraged

Ultra Financials ProShares

(UYG) - Get Report

gained back 3.43% for the week under review. However, since this ETF began trading on Feb. 1, 2007, the total return is -1.54%.

Another ETF doing well this week is

KBW Capital Markets ETF

(KCE) - Get Report

, which grew 3.20%. The fund's largest holdings are

Morgan Stanley

(MS) - Get Report


Goldman Sachs

(GS) - Get Report


Merrill Lynch


and Lehman Brothers.

Goldman's announcement of $2.33 billion in net income for the quarter was an increase of just 1% from the same quarter the previous year. This disappointed shareholders and the stock only gained 2.59%.

This was not a good week to be short the financial sector.

The UltraShort Financials ProShares

(SKF) - Get Report

, a 200% negatively leveraged ETF, sank 2.99%. Since its inception on Feb. 1, 2007, the fund is off by 0.96%.

Another newcomer, the

First Trust/Gallatin Specialty Finance and Financial Opportunities Fund

(FGB) - Get Report

is down 1.18% for the week ended June 14. But this closed-end fund is up 0.75% since inception on May 25, 2007.

Unlike the brokers riding high on renewed interest in the stock market, the bank holding companies are faced with slower growth in new loans, rising expenses and more loans going bad.

Large interest rate moves could force banks to pay more for deposits, squeezing or eliminating the net interest margin on existing fixed rate loans.

Edging lower by 0.65%, the

(BTO) - Get Report

John Hancock Bank and Thrift Opportunity Fund (BTO) holds 91.3% in banks, 4.8% in diversified financial services and 3.9% in savings and loans.

One of the fund's holdings,

First Charter Corporation

(FCTR) - Get Report

fell 3.87% on the disclosure that it wrote 67 loans for properties in a real-estate development based on property appraisals that were inflated.

Lastly, the


Burnham Financial Services Fund (BURKX) just missed breaking even with a loss of 0.09%. The fund's shares in



dove 13.21%. The stock has lost three quarters of its value since going public in 2004, and is now trying to exit the subprime mortgage origination business.

Over the next 10 years, I would not be surprised to see the number of banks in the United States drop below 7,000 as weaker banks get absorbed by stronger ones.

In the short run, the U.S. Congress is drafting consumer protection legislation for mortgage lenders.

By actively monitoring against fraudulent loan practices, the industry can work its way out of trouble and strengthen the asset quality on its balance sheets.

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.