How to Profit From Fitch Ratings Downgrade of Big Banks

Fitch Ratings downgraded the credit ratings of three top European banks and put several other European and American banking giants on notice that they could soon be downgraded as well.Fitch Ratings said that it lowered the credit ratings of UBS AG (NYSE: UBS), Lloyds Banking Group (NYSE: LYG) and Royal Bank of Scotland (NYSE: RBS) because the banks could no longer count on the same level of government support that they had in the past, not because of the banks' financial health.The ratings agency also put Bank of America (NYSE: BAC), Morgan Stanley (NYSE: MS), Goldman Sachs Group (NYSE: GS), Credit Suisse (NYSE: CS), Deutsche Bank (NYSE: DB), Barclays Bank (NYSE: BCS), BNP Paribas and Societe Generale on its negative credit watch list.Fitch Ratings put Bank of America on watch because the ratings agency was concerned with how increased market uncertainty could affect the bank and because the bank is the target of multiple lawsuits related to its mortgage backed securities business. Morgan Stanley and Goldman Sachs were placed on review because of concerns about their business models.Investors who feel that Fitch Ratings' decision to downgrade or place on review the credit ratings of several of the world's most important banks is an ominous sign for the health of the financial sector have a number of investments options to consider. If banking stocks fall, ETFs like Direxion Financial Bear 3X Shares (NYSE: FAZ), ProShares UltraShort Financials (NYSE: SKF) and the ProShares Short Financials (NYSE: SEF) could see their stock prices move higher.Investors who are less risk averse could also short some of the banking stocks that Fitch Ratings placed on review. Fitch Ratings already downgraded three big European banks for similar reasons to the ones given for placing several other European banks under review. If Fitch follows through and downgrades these stocks, investors who already shorted them could see significant profits.On the other hand, some investors might view the downgrades and reviews with less alarm. European banking stocks have been under tremendous pressure because of concerns about their exposure to Greek debt and their ability to find short term funding. If Fitch's downgrades and reviews put further pressure on these stocks, it could be a buying opportunity for long term investors who feel that the banks' stock prices have fallen further than warranted. These investors could buy the banking stocks that have been downgraded and placed under review, or they could buy an ETF like the SPDR KBW Bank ETF (NYSE: KBE) or the iShares MSCI Europe Financials (Nasdaq: EUFN). When financial stocks are back in favor, these ETFs could see their share prices climb significantly.