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Although it’s been a lackluster at best couple of years for financial exchange traded funds (ETFs), today’s moves have us and others wondering if this sector’s ship is finally pulling back in to port.

The good news is that the days of wild swings are fewer and further between. The bad news is that many banks are still cleaning up various messes, so don’t be surprised by hiccups, reports Will McClatchy for ETF Zone.

Progress has been steady for the healthiest banks, and profits have been used mostly for loan writeoffs and fallen investment assets. Despite recovery and stabilization, not all banks are on the same footing these days:

  • Regional banks are hurting right now, but most ETFs are light on them. Good thing, because they’re expected to take massive defaults on commercial real estate loans, which form the core of their loan portfolios.
  • Insurance companies may continue to feel pressure. Their balance sheets are complex, but if asset values strengthen, they’ll come out ahead.
  • Large holding company banks dominate large-cap financial ETFs more than ever. The U.S. Treasury and the Federal Reserve have done all they can to prop up big banks and help them swallow failed ones.

The Fed’s efforts seem to be working: smaller banks are getting gobbled up by larger ones in greater numbers. Hao Li for The International Business Times reports that this type of activity is common for a sector that has been hit hard. Big banks have recovered faster than the smaller banks, and in 2011, the struggle may continue for the little guy.

If this trend sticks, it may be best to keep your focus on funds with huge banks in them and wait for the smaller ones to sort themselves out. Financial Select Sector SPDR (NYSEARCA:XLF), SPDR KBW Bank (NYSEARCA:KBE), iShares Dow Jones U.S. Financial Sector (NYSEARCA:IYF) and PowerShares Financial Preferred (NYSEARCA:PGF) are all worthy options with plenty of exposure to large-cap financials.

Disclosure: No positions

Source: Bigger Is Better in Financial ETFs, For Now