Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stocks Bull Market Smoking Gun - 25th May 24
Congress Moves against Totalitarian Central Bank Digital Currency Schemes - 25th May 24
Government Tinkering With Prices Is Like Hiding All of the Street Signs - 25th May 24
Gold Mid Tier Mining Stocks Fundamentals - 25th May 24
Why US Interest Rates are a Nothing Burger - 24th May 24
Big Banks Are Pressuring The Fed To Losen Protection For Depositors - 24th May 24
Another Bank Failure: How to Tell if Your Bank is At Risk - 24th May 24
AI Stocks Portfolio and Tesla - 23rd May 24
All That Glitters Isn't Gold: Silver Has Outperformed Gold During This Gold Bull Run - 23rd May 24
Gold and Silver Expose Stock Market’s Phony Gains - 23rd May 24
S&P 500 Cyclical Relative Performance: Stocks Nearing Fully Valued - 23rd May 24
Nvidia NVDA Stock Earnings Rumble After Hours - 22nd May 24
Stock Market Trend Forecasts for 2024 and 2025 - 21st May 24
Silver Price Forecast: Trumpeting the Jubilee | Sovereign Debt Defaults - 21st May 24
Bitcoin Bull Market Bubble MANIA Rug Pulls 2024! - 19th May 24
Important Economic And Geopolitical Questions And Their Answers! - 19th May 24
Pakistan UN Ambassador Grows Some Balls Accuses Israel of Being Like Nazi Germany - 19th May 24
Could We See $27,000 Gold? - 19th May 24
Gold Mining Stocks Fundamentals - 19th May 24
The Gold and Silver Ship Will Set Sail! - 19th May 24
Micro Strategy Bubble Mania - 10th May 24
Biden's Bureau of Labor Statistics is Cooking Jobs Reports - 10th May 24
Bitcoin Price Swings Analysis - 9th May 24
Could Chinese Gold Be the Straw That Breaks the Dollar's Back? - 9th May 24
The Federal Reserve Is Broke! - 9th May 24
The Elliott Wave Crash Course - 9th May 24
Psychologically Prepared for Bitcoin Bull Market Bubble MANIA Rug Pull Corrections 2024 - 8th May 24
Why You Should Pay Attention to This Time-Tested Stock Market Indicator Now - 8th May 24
Copper: The India Factor - 8th May 24
Gold 2008 and 2022 All Over Again? Stocks, USDX - 8th May 24
Holocaust Survivor States Israel is Like Nazi Germany, The Fourth Reich - 8th May 24
Fourth Reich Invades Rafah Concentration Camp To Kill Palestinian Children - 8th May 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Goldman Sachs Fraud and ETFs

Companies / Exchange Traded Funds Apr 22, 2010 - 08:37 AM GMT

By: Ron_Rowland

Companies

Best Financial Markets Analysis ArticleLast week the U.S. Securities & Exchange Commission filed a civil lawsuit against Goldman Sachs (GS) alleging fraud. And the news hit Wall Street like a volcano!

Of course the SEC sues companies all the time. Goldman Sachs isn’t just any company, though. Goldman is big — very big — a financial Godzilla with unmatched power and vast political influence.


The immediate reaction was that share prices plummeted 13 percent on April 16, wiping away about $10 billion of Goldman Sachs’ market value. And as you might expect, this loss had an impact on some financial services sector exchange traded funds.

Goldman Sachs is a financial Godzilla.
Goldman Sachs is a financial Godzilla.

But because ETFs are diversified, your potential exposure to problems in any one stock is reduced.

However,

Some ETFs Are More Diversified Than Others

When an ETF has a big concentration in one stock, you’ll probably be happy about it as long as that stock is going up. Unfortunately, stocks that go up quickly can fall even faster.

As of April 15, 2010, seven ETFs had 5 percent or more of their assets in Goldman Sachs stock. Here they are with their approximate weightings:

  • iShares Dow Jones U.S. Broker-Dealers (IAI) — 11 percent
  • SPDR KBW Capital Markets (KCE) — 8 percent
  • WisdomTree LargeCap Value Fund (EZY) — 7 percent
  • WisdomTree LargeCap Growth Fund (ROI) — 7 percent
  • iShares Dow Jones U.S. Financial Services (IYG) — 5 percent
  • Claymore/Clear Global Exchanges, Brokers & Asset Managers (EXB) — 5 percent
  • SPDR Select Sector Financials (XLF) — 5 percent

Additionally, leveraged ETFs have more exposure than what their underlying index suggests. For instance, an ETF like Direxion Daily Financial Bull 3x Shares (FAS) would essentially have 15 percent exposure to a stock with a 5 percent weighting in the underlying index.

So, if you want to be in the financial services sector but keep your individual-company exposure to a minimum, you probably shouldn’t buy any of the funds listed above — and especially IAI.

I also want you to notice something important about the above list …

Some of the funds simply sound like they are a lot broader than others. And the broader they are, the less they typically have in Goldman Sachs.

The two funds from WisdomTree don’t even focus on the financial sector. Even more confusing is the fact that the WisdomTree classification methodology declares Goldman Sachs to be both a “value” stock and a “growth” stock at the same time. Meaning that you cannot always go by the fund’s name.

Another one is SPDR Select Sector Industrials (XLI). It sounds innocent enough. There is no shortage of industrial stocks, but General Electric (GE) accounts for about 13 percent of the XLI holdings.

On the other hand, take IAI. It zeroes in on a sector (financials), a sub-sector within it (broker-dealers), and a certain geographic region (the U.S.). If that’s what you want to specialize in, then of course you’re going to have a big position in Goldman Sachs. No surprises — it’s right there in the name.

How to Reduce Your Company Risk

Some ETFs allocate their assets equally rather than by market capitalization. Others use a modified market-weighted scheme that imposes a cap on any one company.

Rydex S&P Equal Weight Financial Services (RYF), for example, actually has the same stocks as XLF — but they’re spread equally and periodically rebalanced. So instead of Goldman Sachs being more than 5 percent of RYF, its weighting is closer to 1 percent.

Some Financial ETFs include companies from other countries, helping to reduce the exposure to any one stock.
Some Financial ETFs include companies from other countries, helping to reduce the exposure to any one stock.

Simply avoiding Goldman Sachs isn’t a complete solution, though. What if the SEC is just getting started? More firms could be charged. Even if they ultimately prevail, these companies could be looking at years of litigation and bad press.

Sector ETFs are a partial solution to this dilemma. They give you a way to bet on the success of a particular sector without putting all your chips on one company.

Within the financial services sector you’ll find there’s more than just big banks and brokers. There are also regional banks, insurance companies, foreign financials, and other niches. You can stay in the sector, broadly speaking, but go in a different direction with a variety of other ETFs. Here are three to consider:

  • SPDR KBW Mortgage Finance ETF (KME)
  • SPDR KBW Insurance ETF (KIE)
  • iShares Dow Jones Regional Banks (IAT)

Keep in mind, of course, that these other sub-sectors have risks of their own. The mortgage finance group was slammed by the housing downturn, insurance stocks can be hit by natural disasters, and many regional banks are not “too big to fail.”

The bottom line: Successful investing still has a lot to do with balance and timing. So be careful — and do your homework before you buy any ETF.

Best wishes,

Ron

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in