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Financial Funds Aren't Soaring Despite Rate Cuts

Slowing economy keeps gains limited.

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Funds investing in banks, brokerages, asset managers, thrifts, and insurers were flying high in 2000, buoyed by the anticipation of lower interest rates. So when the Federal Reserve cut rates twice in January 2001, these specialty-financial funds shot straight up, right?

Wrong. The average financial fund dipped 0.8% year to date through February 6, while the typical domestic-equity offering gained about 1.5%. What happened? It's the slowing economy, stupid. As Morningstar.com analyst William Samuel Rocco pointed out in a recent Fund Spy, the rate cuts already were priced into these funds' holdings, but more critically, anxiety over layoffs and a possible recession spawned fears over credit quality, hurting banks and other financial companies.

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Odyll Santos does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.