Monday, April 17, 2006

A Merrill Lynch index for all seasons :: Part 2 of 4

This is part two of a four part series. Part one discussed the Merrill Lynch Early Cyclical Index
The next index in the Merrill Lynch basic 4 series, a set of indices containing companies affected by different parts of the economic cycle, is the Merrill Lynch Interest Rate Sensitive Index

The index components are select financial companies from the S&P 500 whose performance is closely tied to the direction and movement of interest rates. The index is a blend of major banks, insurance companies, and mortgage bankers. The top five components are Citigroup (C), Bank of America (BAC), American International Group (AIG), JP Morgan Chase & Co (JPM), and Wells Fargo (WFC). The closest ETF to this index is the Financial Select Sector SPDR (XLF).

Sharing the fate of companies in this sector are Mortgage REITs such as MortgageIT Holdings (MHL) and Annaly Mortgage Management (NLY) as well as specialty finance companies like CIT Group (CIT) and KKR Financial (KFN).

This index has been quite done quite well since November of 2005, coinciding with interest rate increases. In recent months as Federal Reserve policy has become clearer (more inflation, higher interest rates) the index has settled down and now trades in a narrow channel. Many of the companies in index pay generous dividends.

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