Bank ETFs Take a Beating

JPMorgan Chase (NYSE:JPM) is shaking the financial markets as the firm disclosed a $2 billion trading loss from bets on synthetic credit securities. The stock plunged on the heels of that announcement.

And JPMorgan wasn’t the only financial stock in the red last Friday; shares of bank giants Morgan Stanley (NYSE:MS), Bank of America (NYSE:BAC), Goldman Sachs (NYSE:GS) and Citigroup (NYSE:C) fell.

JPMorgan's multi-billion dollar loss is triggering questions from investors regarding the strength and stability of the financial sector, placing pressure on bank-sector ETFs.

The Financial Select Sector SPDR (NYSE:XLF) struggled to shake the losses from its second largest holding, which is JPMorgan. The exchange-traded fund fell Friday, closing down more than 1%. The iShares Dow Jones U.S. Financial Sector ETF (NYSE:IYF) dropped 0.9%, ending the week down 1.4%.

The reported trading loss comes as financial institutions remain under intense scrutiny following the 2008 financial crisis. Regulators are working to finalize restrictions aimed to limit a bank’s ability to trade within its own funds, struggling to draw the line between valid hedging and speculative bets.

But not all investors are spooked by JPMorgan’s loss. Yu-Dee Chang of Ace Investment Strategies says the financial sector is still attractive and the recent report is not a reflection of the entire sector. “This type of activity does not seem to be characteristic of the financial sector as a whole,” said Chang. “We do not expect it to have a sustained negative impact on the sector.”

The $2B trading loss couldn’t sink all financial stocks.  Roughly half of the 81 financial stocks in the S&P 500 traded higher today, boosting the confidence of some skeptic investors.

Other ETFs taking a hit are Vanguard Financials ETF (NYSE:VFH) and RevenueShares Financials Sector NYSE:RWW), down 0.8% and 1.4%, respectively. JPMorgan is each fund’s second largest holding, accounting for 6.4% and 8.7% of each.

Of course, many traders are still bullish on the volatile financial sector, citing this year’s strong start as the driving force behind its potential gains. “The banks are strong, especially in trading operations,” said Chang. “Goldman Sachs only has one unprofitable trading day last quarter. Bank of America Merrill Lynch had a perfect quarter, and Morgan Stanley only posted four days of trading losses.”