Dipping Into Financials With ETFs

The majority of economists are predicting a late 2009 or early 2010 economic recovery, and the recent upswing in the market has been bolstered by some of the sectors that were beat up the most in the recent crisis. As "zombie" banks are separated from healthy banks on the rebound, the financial sector is gaining momentum.

When it comes to financial ETFs, investors have an increasingly large selection, from broad-based indices to specialized subsector funds. The Financial Select Sector SPDR(XLF Quote), PowerShares Financial Preferred(PGF Quote) and iShares Dow Jones U.S. Regional Banks(IAT Quote) funds represent different approaches to the financial sector and different methods for investors to position themselves for recovery.

Financial Select Sector SPDR

Type: Broad U.S. financial sector ETF. Others in this category: iShares Dow Jones U.S. Financial Sector Index Fund(IYF Quote), iShares Dow Jones U.S. Financial Services Index Fund(IYG Quote) and Vanguard Financials ETF(VFH Quote).

What it does: XLF tracks the Financial Select Sector Index (^IXM). The goal of the fund is to provide a low turnover fund with a low expense ratio. XLF includes: diversified financial services; insurance; commercial banks; capital markets; real estate investment trusts (REITs); consumer finance; thrifts and mortgage finance; and real estate management and development.

Who it's for: The top holdings in XLF, the granddaddy of financial ETFs, have been some of the hardest hit by the recent financial crisis. But as the market has proved recently, some of the hardest hit equities have bounced the fastest. Prospective investors should be mindful of the risk/reward factor when considering XLF.

Since XLF offers such a broad exposure to the sector, investors should also be mindful of overlap in their portfolio between XLF and other major ETF index funds such as SPY. XLF is a top-heavy ETF with more than 54% of the fund's assets concentrated in the top 10 holdings. Finally, prospective investors should keep an eye on top XLF components as different banks process the financial crisis.

Top 10 holdings: JPMorgan Chase(JPM Quote), Wells Fargo(WFC Quote), Bank of America(BA Quote), Goldman Sachs(GS Quote), Morgan Stanley(MS Quote), U.S. Bancorp(USB Quote), Bank of NY Mellon(BK Quote), American Express(AXP Quote), Metlife(MET Quote), Travelers Companies(TRV Quote).

Liquidity and fees: XLF has a low 0.21% fee. The three-month average daily trading volume is 228,334,000