5 ETFs Influenced By Global Banking Regulations

Recently, global regulators pushed through increased world banking regulations which will force financial institutions to increase reserves protecting against unexpected losses, with the effects influencing iShares S&P Global Financials (IXG), SPDR S&P International Financial Sector (IPF), the iShares MSCI ACWI ex US Financials Index (AXFN), the Financial Select Sector SPDR (XLF) and the Vanguard Financials ETF (VFH).

More specifically, the new rules are designed to rein in the kinds of risky activities that aided in bringing down the global financial system.  The primary focus of these new rules is the amount of capital that financial institutions are forced to hold.   More specifically, regulators agreed to require banks to hold a specific level of a basic type of capital known as common equity, which is considered the most effective type of capital because it is used to directly absorb losses.  Furthermore, officials agreed large, internationally active banks will have to hold levels of common equity equal to at least 7% of their assets, much higher than the roughly 2% international standard or 4% standard for large U.S. banks.

As for timing of when these increased capital requirements are expected to take place, they will be gradually increased over a period of years.  By 2015, banks will have to begin building a 2.5% buffer of capital that must be fully in place by Jan. 1, 2019.  If banks fall below this buffer, regulators could force them to hold onto more of their earnings to augment their capital which could eventually lead to decreased profits and an overall reduction in global lending. 

As mentioned earlier, some ETFs that are likely to be influenced by these new regulations include:

  • iShares S&P Global Financials (IXG), which boasts HSBC Holdings (HSBA), JP Morgan Chase (JPM) and Berkshire Hathaway (BRK.B) as its top holdings.
  • SPDR S&P International Financial Sector (IPF), which gives exposure to BNP Paribas and the Royal Bank Of Canada (RY).
  • iShares MSCI ACWI ex US Financials Index (AXFN), which boasts HSBC Holdings and Banco Santander SA (SAN) as its top holdings.
  • Financial Select Sector SPDR (XLF), which includes Bank Of America (BAC) and Wells Fargo (WFC) in its top holdings.
  • Vanguard Financials ETF (VFH), which give exposure to numerous financial institutions including Goldman Sachs (GS), American Express (AXP) and US Bancorp (USB).

To further protect against the inherent risks that are involved with investing in these equities, the use of an exit strategy which identifies specific price points at which downward price pressure is likely to be seen is important.  Such a strategy can be found at

Disclosure: No Positions

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