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Three ETFs Influenced by Fed's New Stress Test

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Large financial institutions -- such as Bank of America, JPMorgan, and Citigroup -- will likely have to forego significant increases in dividend payments to shareholders to keep cash on their balance sheets.

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In an attempt to ensure that US financial institutions are financially stable, the Federal Reserve recently announced a new round of stress tests, influencing the Financial Select Sector SPDR Fund (XLF), the iShares Dow Jones US Financial Sector Index Fund (IYF), and the Vanguard Financials ETF (VFH).

These tests are expected to prove a financial institution's ability to withstand another economic recession, in that they would illustrate enough capital reserves to absorb potential losses over the next two years. As a result of this, large financial institutions that are overseen by the Federal Reserve, like Bank of America (BAC), Wells Fargo (WFC), JPMorgan Chase (JPM), and Citigroup (C), will likely have to forego significant increases in dividend payments to shareholders to keep cash on their balance sheets.

At the end of the day, these stress tests are being used to ensure that the large financial institutions have enough capital to absorb the anticipated wave of foreclosure losses and the fees that are likely to come along with them over the next 24 months, and are being put in place to prevent a catastrophic financial meltdown.

As mentioned above, three ETFs that are heavily allocated to financial institutions that will be influenced by the new stress test include:

  • Select Sector SPDR Fund, which allocates more than 54% of all assets to its top 10 holdings, including JPMorgan Chase, Wells Fargo, and Bank of America.

  • iShares Dow Jones US Financial Sector Index Fund, which allocates more than 40% of its assets to its top 10 holdings, including JPMorgan Chase, Citigroup, Bank of America, and Wells Fargo.

  • Vanguard Financials ETF, which allocates more than 42% of its assets to its top 10 holdings, also including JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo.
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No positions in stocks mentioned.

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