This week I traveled from our Florida office to

TheStreet.com's

main office on Wall Street. Since New York City is the financial capital of the world and, more importantly, since the

Federal Reserve

spoke on interest rates Wednesday, I thought it appropriate to review the performance of the financial funds this week.

In leaving short-term rates unchanged at 5.25%, the Federal Open-Markets Committee signaled happiness with an economy expected to "expand at a moderate pace" while the housing market shows "tentative signs of stabilization" and inflation is "likely to moderate."

The Fed's economic endorsement prompted the Dow Jones Industrial Average to rally to a new all-time high of 12,682.57 Thursday.

The stable outlook for rates allowed the stocks in the PHLX/KBW Bank Index to continue their bull run and approach the record high set in December 2006. From the close of trading on Thursday, Jan. 25, through the close on Thursday, Feb. 1, the average financial fund rated by TheStreet.com Ratings rose 1.56%.

The FBR Small Cap Financial Fund , a relatively more volatile fund, with an E-plus rating, topped our list of best performers, returning 3.18% over the five trading days reviewed.

All of the fund's holdings are U.S. stocks, with 65.2% savings & loans, 24% banks, 5.2% REITS, 5.0% diversified financial services and 0.6% insurance.

FirstFed Financial

and

Hudson City Bancorp

(HCBK)

are the two largest holdings, but the fund's shares in

Stancorp Financial Group

(SFG)

and

Pennfed Financial Services

(PFSB)

rose the most.

Stancorp stock gained 9.45%, hitting a new high, on a fourth-quarter earnings surprise, and Pennfed added 5.58% after an analyst upgraded

New York Community Bancorp

(NYB)

, which is acquiring Pennfed in an all-stock transaction.

Next on the best-performer list is the

(FNPIX) - Get Report

ProFunds Financials UltraSector, which attempts to track 150% of the return of the Dow Jones U.S. Financial Sector Index.

Its largest holdings include financial giants such as

Citigroup

(C) - Get Report

,

Bank of America

(BAC) - Get Report

,

American International Group

(AIG) - Get Report

and

JPMorgan Chase

(JPM) - Get Report

, and the median market cap of all holdings is $37.7 billion.

Diversified financial services account for 34.1% of assets, while banks make up 29.4%, insurance 21.6%, REITs 9.7%, savings and loans 3.3% and commercial services 0.78%.

The stocks that contributed the most to the fund's overall performance for the period include

Jones Lang Lasalle

(JLL) - Get Report

, which climbed 11.75% on a 21% increase in fourth-quarter profits and talk of new growth through acquisitions, and

Unumprovident

(UNM) - Get Report

, which was lifted 9.71% after reporting a 66% increase in fourth-quarter pretax earnings.

The one financial fund bucking the trend is the

First Financial Fund

(FF) - Get Report

, which fell by 0.54%. The closed-end fund's largest holdings include

First Republic Bank/San Francisco

(FRC) - Get Report

,

UBS AG

(UBS) - Get Report

and

BankUnited Financial

(BKUNA)

.

In aggregate, 48.5% of the fund's holdings are banks, 24.4% are savings and loans, 10.3% are insurance companies, 9.0% are in diversified financial services, 3.1% are REITS and 1.6% are in telecommunications. The value of its holdings actually rose during the week, notably First Republic Bank/San Francisco, which announced Monday that it's being acquired by

Merrill Lynch

(MER)

.

As a result, First Financial Fund's discount to its net asset value widened. The fund's shares are now trading at a 4% discount to assets, compared with an average premium to NAV over the past year. Unlike open-end funds, which continuously issue and redeem shares, closed-end fund issue a fixed-number of shares that trade throughout the day like stocks. So their share prices can move independently of the value of their holdings. But at this level, First Financial looks a lot more attractive, since investors can pick up its holdings on the cheap.

Ironically, the First Financial Fund was the best-performing fund the last time I reviewed financial stocks for this weekly column, back on Oct. 13, 2006.

Kevin Baker became the senior financial analyst for TSC Ratings upon the August 2006 acquisition of Weiss Ratings by TheStreet.com, covering mutual funds. He joined the Weiss Group in 1997 as a banking and brokerage analyst. In 1999, he created the Weiss Group's first ratings to gauge the level of risk in U.S. equities. Baker received a B.S. degree in management from Rensselaer Polytechnic Institute and an M.B.A. with a finance specialization from Nova Southeastern University.