There are currently nearly 40 ETFs oriented to the financial sector. The following analysis features a reasonable list of ETF selections. We believe these constitute the best index-based offerings individuals and financial advisors may utilize.
ETFs are based on indexes tied to well-known index providers including Russell, S&P, Barclays, MSCI, Dow Jones and so forth. Also included are some so-called "enhanced" indexes that attempt to achieve better performance through more active management of the index.
The financial sector has been at the epicenter of economic and stock market woes during the 2008-2011 (and perhaps beyond) periods owing primarily to the housing bubble bust and collapse of security products created to accommodate rising real estate prices. As investors know this collapse has led to ongoing bailouts and bankruptcies. The sector is on the mend to start 2012. It's quite remarkable that from mid-November to mid-February 2012 (a three month span) many ETFs featured have gained as much as a stunning 50%. Even the most seasoned issues like XLF have reversed from 25% losses to 12% gains. This puts the entire sector as overbought since this pace of gain is typically unsustainable.
Markets overall are in rally mode to begin 2012 albeit on ultra-light volume. One thing is historically true; there has never been a sustainable bull market without financials being with the trend or a leader. Investors need to pay attention to this going forward and monitor this relationship.
One thing you'll note with charts posted are the similarities in trends and performance from one to another. This isn't a coincidence given overall index constituent similarities. Further, the easy money policies of the Fed during the period covered have made performance results hardly distinguishable one from another.There are catchall sectors like XLF covering the entire sector and individual areas like banking, brokering and insurance for investors wishing to isolate and target their focus. So-called "enhanced" indexes can outperform on the upside but perhaps underperform as markets decline. We believe for these ETFs a more active trading approach is necessary.