This Sector’s About To Explode

| October 2, 2009

If money makes the world go ‘round, then banks are the engine fueled by money.  The financials are unlike any other industry.  It’s the one industry essential to the success of all others.

Think about it.  Does a consumer staples company like Kraft (KFT) care if semiconductor sales are slumping at Intel (INTC)?  No.  Because it doesn’t directly impact their business.

But it’s a different story for financials.

Banks lend money to small businesses.  Without the loans, many would never get off the ground.  Those same loans help existing businesses grow.  Lending impacts every aspect of a growing business.

Not only do they fund business growth, they fund consumer spending.  Without banks, consumers are forced to save huge amounts of money before making a single purchase.  (How long would it take you to save up enough money to buy even a modest $100,000 home?)  Without these loans, we’d have a lower standard of living.

A strong financial system has allowed the global economy to grow and the standard of living to improve.  Just look at all of the comforts we take for granted today that didn’t even exist 100 years ago.

Our way of life is possible thanks to our financial system.  People invest money in companies to create goods that improve our quality of life.  Banks lend money to people so they can buy those goods.  And the financial institutions turn a very nice profit along the way.

In fact, they’re one of the most profitable parts of the economy when times are good.

There’s a downside however.  When the economy is booming, nobody thinks it will ever end.  Banks want to lend more money and people want to borrow more.  Eventually good borrowers become harder and harder to find.  So banks start to loosen their lending standards to keep their business growing.

Everything’s great ‘til the music stops.  Then loans made to the least credit worthy borrowers go bad quickly.  That’s the situation financial institutions in developed countries are facing today.  It led to the economic devastation and credit crisis we’ve been living through.

Today these banks are still dealing with the hangover from a big lending binge.  The old loans from the last boom are weighing down the banking stocks.  These loans bring an unknown element of risk into the picture. And they’re the only reason I’m not outright bullish on the entire financial sector.

But what if there’s a way to invest in the financial industry without the hangover from the last boom.

Well you can do just that with a new ETF launched last month.  Emerging Global Shares now has an ETF focused entirely on financials in emerging markets.  It’s the Emerging Markets Global Titans 30 Index (EFN).

EFN owns stock in 30 different banks and other financial companies in emerging markets.  They’re spread across ten different countries.  Chinese, Brazilian, and Indian stocks make up the lion’s share of the ETF.

The deck seems like it’s stacked in EFN’s favor.

First off, financial companies in emerging markets aren’t saddled with toxic debt.  Just think how happy Citigroup (C) would be in that situation.

Secondly, emerging markets’ economies usually recover faster than developed countries.  They also grow at a much quicker rate.  And we all know how important growth is.

And lastly, the financial system isn’t as developed in many emerging markets.  Now as the global economy recovers, these countries will see a major growth spurt in their economy and financial industry.

Investing in EFN is almost like traveling back in time to invest in JP Morgan Chase (JPM) and Citigroup when they were just starting out.

There’s no question about financial companies ability to turn a profit in a good economy.  Now as the world economy recovers, financials are poised to rake in huge profits.  And there’s no better way to do it than the emerging markets.  Thanks to EFN, you can do it with one easy purchase… (Aren’t ETFs great?!)

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Category: ETFs

About the Author ()

Corey Williams is the editor of Sector ETF Trader, an investment advisory service focused on profiting from ETFs and the economic cycle. Under Corey’s leadership, the Sector ETF Trader has become one of the most popular and successful ETF advisories around. In addition to his groundbreaking service, Corey is the lead contributor to ETF Trading Research, where he shares his insights about ETFs and financial markets on a daily basis. He’s also a regular contributor to the Dynamic Wealth Report and the editor of one the hottest option trading services around – Elite Option Trader.

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