Fannie Fallout

Fannie Mae faces all sorts of allegations. I don't know how it will work out but I can't really imagine that it is anybody's best interest to radically disrupt the business, it is too enmeshed in the mortgage business, which is vital to President Bush's ownership society. That does not mean that things could not be radically different for the stock price.

89% of Fannie's of shares are owned by institutions, including mutual funds. Fannie has always been an over owned stock. A lot of that institutional money is benchmarked to an index and so needs a certain amount of exposure to the financial sector. While I don't think this has started to occur yet, it would not be surprising to see money flow from Fannie to other financial stocks, thus lifting the price of those other financials.

I took a look at the financial sector ETFs to see if there might be a way to play this. Ideally the best ETF would have a little exposure to Fannie and Freddie Mac as possible and I would want to minimize exposure to the insurance group if possible because there is plenty of headline risk there too.

ETF Fannie Weight Insurance Exposure

XLF 2.8% AIG 8%

VFH Yes* AIG*

IYF 2.4% AIG 6%

IYG 3.4% not in top 10

IXG 1.4% AIG 4%

RKH 0% 0%

* percentage not available

RKH is the Regional Bank HOLDRs so there is no Fannie and no insurance so this might be the purest play if this idea has any merit at all. Another way would be IXG iShares S&P Global Financial Sector ETF.

For disclosure purpose I will say that this is not the type of narrow trade I try to find for my clients. I have been thinking about increasing domestic exposure to the financial sector and this may be a catalyst in the next few weeks.