Expert: Paul Henneman - 2/10/2009

Question
The longer this financial crisis goes on the more I think that the only way to fix it is by fixing the banks first before any kind of fiscal stimulus, with that said I also believe the banks will take such a hit that they'd need to be temporarily nationalized.  Now for my question, I've been taking these bad times to load up on a financial ETF (xlf) I'm young and I invest for the long term and I'm not into trading, so I could care less if XLF falls to even 3 or 4 dollars a share because I beleive EVENTUALLY it will come back, but now I'm thinking.....what happens to the positions that make up the ETF if they are all nationalized?  If the banks that make up the largest portion of the etf are nationalized would the fund go to $0 or would it restructure to the banks that aren't nationalized?

Answer
Alex,
   Thank you for your question!
Yes, you are right to worry about this. There is no precedent for what is currently happening to the banking industry, so there is no real answer as to what would happen to your investment if the banks are nationalized, or fail. It is difficult to imagine that all of the investors with financial industry holdings would lose their entire investment, but again there is no real example from previous times to look at. You are right that in the long term the financial industry will come back, it has to. But, there is that risk.
   If you are looking for a long term play, oil may be better, with less risk of losing that investment. There are ETF's out there that track the price of oil, and are currently trading at low prices. Oil is a scarce resource, meaning that there is a certain amount available, and it can only be pumped out of the ground and refined at a certain pace. When the world economy begins to recover, the price of oil will surge again. This is a long term play that may be even better than the financial sector, without the risk.
   The ultimate answer could be to do both. Spread your risk out. The stock market took a hit today. No one can predict if it will drop further or by how much, but it is a long term once in a life time buying opportunity. You could therefore also buy index ETF's that trade overall indexes, such as the S&P500. The ticker for the ETF that tracks the S&P500 is SPY for example. So there are a total of three different types of ETF's to spread out your risk: Financial, Oil, general Index.  All three should treat you well in the long term.

I hope 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