ETF Expert

Less and less people are smoking. Naturally, that spells trouble for the #1 cigarette maker, Altria.

So what did the Marlboro men do about it? They bought the Skoal and Copenhagen smokeless chewing tobacco brands with a $10 billion acquisition of UST Inc. (People still chew, apparently!)

Yet, the big story may have been overlooked. Specifically, Altria utilized Goldman Sachs (GS), the best-run investment firm, and J.P. Morgan Chase (JPM), the Fed’s favorite bank a la the Bear Stearns bailout, to finance the deal.

Individual stock investors will likely win with JPM and GS. Yet the volatility in financials may make it a bumpy road.

Enter Financial ETFs. In particular, which ETF has the largest exposure to the eventual winners (i.e., Goldman Sachs, J.P Morgan, Wells Fargo, etc.) in high finance?

Here, then, are a few possibilities:

1. The iShares Dow Jones Financial Services Fund (IYG). This fund has typically taken a backseat to the better-known financial ETF, the Financial Select SPDR (XLF). They are both down roughly the same amount through 9/5/08 — -25% YTD and -40% from the 52-week top. Ouch!

The top 10 holdings are quite similar; yet, IYG has a greater concentration in those top holdings and a greater allocation to JP Morgan (JPM) and Goldman Sachs (GS).

In fact, the iShares Dow Jones Financial Services Fund (IYG) has nearly 40% in the financial world’s "Untouchables" (Bank of America, Wells Fargo, JP Morgan, US Bancorp and Goldman Sachs). The Select Financial SPDR (XLF) has approximately 25% there. One might surmise that IYG will outperform XLF during a future financial recovery because of greater exposure to untouchable institutions.

2. Berkshire Hathaway Class B (BRK-B). Not an ETF you say? Read my earlier commentary on why Warren Buffett’s company could be the perfect ETF for beaten-down financials.

5 of the top 10 holdings in the Berkshire Hathaway portfolio are financial companies. One-third (33%) of the value of the holdings belong to the likes of Wells Fargo, American Express and US Bancorp. In fact, Wells Fargo alone, the nation’s #1 retail bank, represents 15% of the value of the holdings in Berkshire.

Berkshire Hathaway Class B (BRK-B) has taken its lumps in 2008. However, since the July 15 lows, here’s how Warren Buffett has fared:

3.streetTracks Regional Banking (KRE). All right… perhaps this is a bolder move. Eleven financial institutions have folded already, and another 111 may go down before the credit fiasco has finished up. Smaller regionals may be at risk.

That said, this is the one financial ETF that is actually down MUCH less than the market in 2008. Through 9/8, it is down a mere -2.7%. And it’s the only ETF above its long-term 200-day trendline.

(Maybe holding onto short financial ETFs isn’t as profitable as one might think.)

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.