NEW YORK ( TheStreet) -- After the Senate's passage last week of the largest financial overhaul since the Great Depression, investors may be wondering how the legislation will affect ETFs such as Financial Select SPDR ( XLF) and how they can position their portfolios to benefit from the new legislation.

Although the 1,500-page bill passed by the Senate still needs to be reconciled with a House bill passed in December, there are already many aspects of the two bills that are similar, and these measures can be counted on to end up in the final package.

For one, both the Senate and House versions of the bill include greater protection for consumers from credit card issuers through a new consumer protection agency. In the Senate's version of the bill, the agency will exist within the Federal Reserve, whereas in the House's version, the agency will operate independently. In either case, however, the agency will exist, and limitations will be placed on credit and debit card issuers.

Although some expect card issuers to pass the expected higher costs on to businesses instead of consumers, this would still lead to less credit card usage and lower profits for card companies.

Beyond the familiar names we see daily on cards and in stores such as Visa ( V) and American Express ( AXP), many large banks, such as Bank of America ( BAC) and Citigroup ( C) also issue debit cards. These companies will see their pricing power diminished, and this could bite into their earnings.

An ETF with a large amount of exposure to these types of consumer credit companies is the Dow Jones U.S. Financial Services Index Fund ( IYG). Bank of America, Citigroup, American Express and Visa account for 24.5% of the ETF's holdings.

This means that among financial ETFs right now, IYG is not an ideal choice.

On another issue, the Senate's version of the bill would not allow banks to engage in proprietary trading. Since this was something proposed by President Obama in January, after the House bill had been passed, it is not included in the House version of the bill. But it could wind up in the final merged legislation.

Large banks such as Goldman Sachs ( GS) that have active and successful proprietary trading branches obviously are opposed to this ban, and their shares will take a hit if it becomes law. In the meantime, funds with exposure to these big banks will underperform funds such as SPDR KBW Regional Banking ( KRE).

Large banks also may get stung by provisions in both versions of the bill that require banks to maintain a position in complex financial products that they sell, such as mortgage-backed securities.

XLF's exposure to companies such as Visa, American Express, Bank of America and Goldman Sachs is less concentrated than IYG's. Nevertheless, it's exposure isn't small, and it holds other banking behemoths in its portfolio.

Instead of playing the large firms for exposure to the financial sector, I would advise holding a fund like SPDR KBW Regional Banking ETF. KRE's holdings are comprised of smaller banks such as Webster Financial ( WBS), First Midwest ( FMBI) and Fulton Financials ( FULT).

I still believe that large financials will rally in the long term, but until the financial package is completely digested in its final form later this summer, KRE should outperform funds such as the SPDR Financial Select ETF.

What's more, small banks have had some beneficial provisions written into the Senate's version of the bill. Senators found it difficult to ignore constituents' anger about the profits made by large financial institutions at the height of the recession.

In conclusion, KRE is the financial ETF of choice during the rest of the legislation process, while investors should avoid a fund such as IYG. Longer term, the big banks should still be viable and profitable after the legislation is signed into law, but they still have some lumps to take. Investors with a long-term focus on financials may want to pick up shares of XLF on weakness.

-- Written by Don Dion in Williamstown, Mass.

At the time of publication, Dion had no positions in equities mentioned.

Don Dion is president and founder of Dion Money Management, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.