Expert: Paul Henneman - 2/20/2009

Question
How are you, I asked you a question not to long ago about being fearful of my XLF shares because of the possibility of banks being nationalized for awhile, this morning it appears that a lot of other people have realized those same fears.  I looked up the holdings again on XLF and i'm not positive but it looks like they changed the holdings a bit, for example JP Morgan and Wells Fargo are the 2 top holdings but it used to be BAC and MS.  Do ETFs in this kind of example change the percentages they hold of certain companies based on there performance? because if thats the case I really don't see a reason to sell out.

Answer
Alex,
  Thank you for your follow up question! Every ETF is different. I did find the below link that lists the current weightings of XLF:

http://www.sectorspdr.com/spdr/composition/?symbol=XLF

Here is another link that very briefly states how the weightings are assigned: Percentage is the estimate weight of the index components in the S&P 500
http://www.sectorspdr.com/eqsnaps/?do=snapshot&symbol=XLF

As the market cap of each company change, the ETF probably adjusts that holdings. Market cap is a function of price times outstanding shares, so if the price drops and no additional shares are issued, the market cap drops.

The problem may be that since this ETF holds financial stocks, they are all dropping in price. So their market cap sizes in relation to each other will be similar, as the entire industry is falling. If a financial company performs particularly poorly compared to is peers, theoretically its weighting will be reduced. If additional shares are released, this can complicate things.

I hope that this helps! Please do not hesitate to follow up with me if I can be of any additional service,

Sincerely,
Paul Henneman
President
ValuEngine Inc
www.ValuEngine.com