Financial Funds Slide 25% This Week

With the S&P 500 recording its worst week ever, people opened their third-quarter brokerage-account statements and capitulated to panic-selling across virtually every sector other than precious metals.

For the week ending Thursday, Oct. 9, the S&P 500 crashed 18.3%, the Dow Jones Industrials slid 18.1% and the Nasdaq-100 dove 14.5%. Financial stocks did worse, with the KBW Bank Index of 24 money-center banks careening 30.4% in search of a bottom. The average financial sector fund we track lost 25.4% of its value.

One impediment to finding the bottom is the lingering question of, "When will the recession begin?" As long as that guillotine is hanging over our heads, the market outlook remains bearish. Once the official economic cycle dating committee of the National Bureau of Economic Research admits our economic problem began back in January of this year, we can work through the pain and look ahead to better times.

Until then we will chronicle the damage. Since July 2007, more than 131,000 jobs worldwide have been cut at financial firms reeling under $587 billion in mortgage losses and writedowns.

The worst performing financial fund this week is the Rydex 2X S&P Select Sector Financial ETF ( RFL), bisected on an incredible 54.4% loss tracking 200% of the return of the Financial Select Sector Index. Of the 84 index members, returns of -74.6% in XL Capital ( XL), -53.9% in Lincoln National ( LNC), -51.4% in Keycorp ( KEY), and -51.4% in Merrill Lynch ( MER) stand out.

XL Capital disclosed a lower book value on declining investments and a stock sale to bail out its acquisition of bond insurer Syncora Holdings. Investment losses at Lincoln National triggered a 49% cut in its quarterly dividend and the suspension of its share-buyback program. Estimates of a third-quarter mortgage writedown hit a high of $10 billion at Merrill Lynch as its loss-per-share estimate climbed.

The asset value of the ProShares Ultra Financials ( UYG) was likewise cleaved in two with a 51.3% decline for the period. On top of XL Capital, Lincoln National, Keycorp and Merrill Lynch, the fund also suffered wounds of -64.5% from Protective Life ( PL), -53.1% from Conseco ( CNO), and 49.9% from Principal Financial Group ( PFG).

The fund losses were not restricted to ETFs. An open-end fund, Banks UltraSector ProFund ( BKPIX), leveraged 150% to the Dow Jones U.S. Banks Index, severed 44.1% from fund-holder value on declines of 46% in Bank of America ( BAC) and 42.5% in Citigroup ( C), among others. Bank of America is having to buy back $4.5 billion in auction-rate securities and Citigroup lost out on the Wachovia ( WB) battle with Wells Fargo ( WFC).
Worst Performing Financial Funds for the Week Ending Thursday Oct. 9
Fund Ticker Rating Fund Type 1 Week Total Return
Rydex 2X S&P Select Sector Financial ETF RFL U ETF -54.39%
ProShares Ultra Financials UYG E+ ETF -51.25%
ProFunds Banks UltraSector ProFund BKPIX E- Open-End -44.07%
First Financial Fund Inc FF E+ Closed-End -43.01%
First Trust Specialty Finance and Financial Opportunities FGB E Closed-End -40.92%
ProFunds Financials UltraSector ProFund FNPIX E- Open-End -40.53%
Diamond Hill Financial Trends Fund Inc DHFT C- Closed-End -32.51%
AIM Financial Services Fund FSFSX E- Open-End Pension -31.70%
PowerShares FTSE RAFI Financials Sector Portfolio PRFF D ETF -30.35%
Financial Select Sector SPDR Fund XLF C- ETF -30.30%
Source: Bloomberg & TheStreet.com Ratings

With only two financial funds, both inverse funds tracking the opposite of the Dow Jones U.S. Financials Index, gaining this week, the ten best performing fund list has been intentionally omitted. For the five trading days under review, the unleveraged Short Financials ProShares ( SEF) jumped 35.50% and the 200% leveraged UltraShort Financials ProShares ( SKF) spiked 77.93%!

For more information, check out an explanation of our ratings.

Kevin Baker became the senior financial analyst for TSC Ratings upon the August 2006 acquisition of Weiss Ratings by TheStreet.com, 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.

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