Will J.P. Morgan's Earnings Move These ETFs?
News flash: Dow component J.P. Morgan Chase (NYSE: JPM) reports fourth-quarter results Friday before the bell. Analysts expect the bank to report a profit of 94 cents share on revenue of $23.44 billion.
Those numbers will be below what the bank reported in the fourth-quarter of 2010, shifting attention to what Jamie Dimon and friends have to say about the outlook for 2012. What's going with the investment banking business? Trading revenue? Write-downs for bad loans? And who can forget about the dividend that still languishes more than 50% below where it was before the financial crisis?
We're not saying tomorrow's report from J.P. Morgan Chase is the end all and be all of earnings season, but it should provide important clues regarding the health of the U.S. economy and the banking business overall.
Consider these ETFs beyond the Financial Select Sector SPDR (NYSE: XLF) as plays on the JPM earnings.
Market Vectors Bank and Brokerage ETF (NYSE: RKH) The Market Vectors Bank and Brokerage ETF is another one of the old HOLDRs funds that made the conversion to being a Market Vectors ETF and JPM is the ETF's second-largest holding with an allocation of almost 9.9%. This is the first earnings season for the new version of RKH and a strong report from JPM could put in the ETF in position to break resistance at $78.
PowerShares KBW Bank ETF (NYSE: KBWB) Flying under the radar in terms of bank ETFs, we have the PowerShares KBW Bank ETF, which debuted last December after PowerShares opted to use some KBW indexes that were ditched by the SPDR funds. So yes, KBWB qualifies as a "new" ETF. JPM nudges Citigroup (NYSE: C) for the top spot in KBWB's lineup at almost 8.1%, but beyond JPM's earnings, consider KBWB because it has a distribution yield of 4.83%, according to the PowerShares Web site. The ETF is up almost 10% to start 2012.
iShares Morningstar Large Value Index Fund (NYSE: JKF) The iShares Morningstar Large Value Index Fund isn't so much a play on JPM's earnings as it is a play on the positive sentiment that could be created with a bullish outlook from Mr. Dimon. JPM is the ETF's seventh-largest holding and financials are the ETF's second-largest sector weight, JPM is important to this ETF, but not a game-changer either way. Continued strength in U.S. larges-caps probably takes JKF to $64.
iShares Dow Jones US Financial Sector ETF (NYSE: IYF) JPM is the second-largest holding in the iShares Dow Jones US Financial Sector ETF, an ETF that like XLF, has really started to show signs of life this year following a dreadful 2011. Investors should opt for XLF because it has the lower fees, but traders would be better served with IYF because it is more volatile than its SPDR counterpart. If JPM disappoints, it's critical IYF hold its 200-day moving average or the ETF could endure more near-term declines.
Traders who believe that J.P. Morgan Chase shares are on the move higher, might want to consider the following trades:
- Long XLF or IYF. Either are suitable proxies for JPM.
- Sell puts on JPM as an income play.
- Buy the stock out right as potential dividend growth play.
Traders who believe that JPM could fall, may consider alternative positions:
- Long the ProShares UltraShort Financials (NYSE: SKF).
- For more risk/reward, long the Direxion Daily Financial Bear 3X Shares (NYSE: FAZ).
- Short IYF.
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