When the U.S. financial sector experienced an unprecedented meltdown and set off a global recession, many investor wondered just how far financial stocks would slide. After struggling to find a bottom for nearly two years, many financials ETFs have found their footing since hitting market lows in March, posting solid gains for the year.

But there are a few glaring exceptions.

One year ago yesterday, Lehman Brothers collapsed and sent the entire financial system and its related ETFs on a downward spiral. Today, the picture looks much different. Are financial ETFs ripe for the picking?

Since the market lows on March 9, financials have rebounded handsomely, up as much as 140% since then. Most of them are perched firmly above their 200-day moving averages, as well.

According to its August Atlantic Hurricane Outlook, the National Oceanic and Atmospheric Administration (NOAA) expects a “near- to below-normal Atlantic hurricane season as the calming effects of El Niño continue to develop.”

After getting off to a very mild start (there has been little activity since the official June 1 start of the season), it appears that as we enter the historical peak period, increased signs of activity are indicating it might not be smooth sailing ahead.

The bear market took a huge toll on the insurance industry, but it appears that better days might be ahead, sending stocks and exchange traded funds (ETFs) moving in a positive direction. Billions in writedowns in the industry have tarnished its reputation and led to the need for billions in bailout money for some of its largest players.

These groups have historically been known to lead market recoveries, but then again, this isn’t a typical market. Last Friday was a promising day for the Hartford Investment Group (HIG), Travelers (TRV), Chubb Corp (CB), PartnerRe Ltd. (PRE), and SPDR KBW Insurance ETF (KIE), which have all gained tremendous ground from its bottomed-out values seen in October, states Michael Kahn at Barron’s. KIE is down 50.5% year-to-date.

Ed McRedmond is the senior vice president of portfolio strategies at Invesco (IVZ) PowerShares. He joined the exchange-traded funds provider in 2005 after working for 17 years at A.G. Edwards, where he was associate vice president. While at A.G. Edwards, McRedmond served as a senior analyst covering ETFs and closed-end funds and was part of the team that launched and managed A.G. Edwards' discretionary ETF wrap portfolios.

Earlier this week, IU.com Managing Editor Murray Coleman caught up with McRedmond to find out the reasons behind PowerShares' recent plan to cut fees on its fundamentally based ETFs, as well as developments with other products. (See related story here about the changes to the funds, which are maintained and designed with FTSE Group and Research Affiliates.)

Insurance companies have seen their share prices plummet along with those of their investment banking brethren. Fear, however, may have caused some investors to underestimate the value of some insurance companies’ balance sheets. While insurance giants have suffered the blow from subprime exposure, some analysts have begun to emphasize the value in the plain-vanilla investments at the heart of many insurance companies’ investments.

With cleaner balance sheets and more transparent structures, many insurance companies have been surprisingly resilient in the face of financial crisis. This trend has been mirrored in our Sector Momentum Rankings and the performance of the PowerShares Dynamic Insurance Portfolio (PIC). From September 3 to October 1, PIC moved from the No. 24 position in our rankings to the No. 7 position. Year to date, PIC is down less than 15%—a nearly 12% improvement over that of the S&P 500.

The insurance industry is fighting back against the kind of articles which accuse it of price-gouging, especially when it comes to natural disasters in general and hurricanes in particular. Yesterday Munich Re held a webinar for journalists, and wheeled out a lot of statistics relating to natural disasters in the first half of 2008. And they're pretty compelling when it comes to the hypothesis that natural disasters are getting more frequent and more damaging.

Here, for instance, is a chart of H1 natural disasters in the US going back to 1980. While the number of geophysical disasters has remained very low, the number of climatological disasters has more than doubled. And it's still growing fast: the number of disasters in just the first half of 2008 was bigger than the number of disasters in any of the full years between 2001 and 2005.

At an admittedly cursory first read, my initial reaction to the Treasury plan to save us all from financial markets is to short housing and insurance. Those are the two main areas that will bear a new and heavier regulatory burden.

Housing is proposed to be subject to a new Mortgage Origination Commission. Because markets are so awful, and companies can't decide whether to enter the mortgage business themselves, we now are apparently going to have the MOC deciding whether states are up to snuff with respect to the certifying companies permitted to enter the mortgage origination business. Gagh! Kill me.

Many investors like to invest in equity ETFs with high dividend yields to get income while spreading risk across a number of stocks. We recently screened our list of over 500 ETFs to find the ones with the highest yields. Below we highlight our results.

As shown, REM, DFE, TTH, PGF and KRE have the highest 12-month dividend yields of the ETFs we track. Most of the stocks on the list are US equity ETFs, however, there are a number of high-yielding international equity ETFs as well. DFE, EEW, CVY, DNH, EPP, EWI and EWA all track non-US equity indices.

Financial ETFs are a bad deal these days, right? Not so fast. The Claymore/Clear Global Exchanges, Brokers (EXB), which launched in June, is actually up 11.7% in the last three months, and it's one of a few that have had positive returns of late.

Meanwhile, the Financial Select Sector SPDR (XLF) is down 11.4%. The fund includes diversified financial services, insurance companies, commercial banks, capital markets and REITs. The SPDRs (SPY) is up 0.1%. The financial sector is largest in the S&P 500.

Insurers breathed a collective sigh of relief Tuesday after Hurricane Dean was downgraded to a category 1 storm without having inflicted damages as catastrophic as had been feared. Disaster modeling firm Risk Management Solutions put the likely costs to insurers at $750M to $1.5B, well below the costs that could have been incurred had Dean, which previously was rated a category 5 storm, hit popular vacation spots on the northeastern coast of Mexico’s Yucatan Peninsula. Risk Management said the majority of costs likely will come from Jamaica, with just $300M in claims likely to emerge from Mexico. Had Dean, the first hurricane of the 2007 season, tracked 150 miles further north and hit the popular tourist areas of Cozumel and Cancun, Risk Management said the costs in Mexico could have tripled. “Though Jamaica has taken a large hit, the track for a category 5 storm could hardly have been better planned to minimize the damage,” RMS said. In 2005, Hurricane Katrina and other big storms cost the industry a record $58B, according to the Insurance Information Institute. The news was also good for the oil industry as major refineries escaped damages. Crude futures dropped below $70 a barrel for the first time in nearly two months, closing down 2.3% at $69.47/bbl. on the New York Mercantile Exchange, while natural gas futures closed at their lowest level in 2½ years. “Oil and gas have proven that when a market rallies in anticipation of an event like a hurricane, and it does not happen, the downside reaction is larger than it would have been had we not had the storm in the first place,” said Alaron Trading analyst Phil Flynn.

Nick Perry (Schaeffer's Investment Research) submits: Last week, we saw that the PowerShares WilderHill Clean Energy Fund (PBW) led a broad-based rally. This week we find the action turned lower:

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Nick Perry (Schaeffer's Investment Research) submits: I have changed the column around this week. I still have the week's leading and lagging ETFs, but am introducing a "profile" section that delves into an ETF. With the profuse proliferation of ETFs, it is becoming increasingly harder to stay abreast of everything that is out there. My intent it to use this space to dig into the details of a particular fund or to compare and contrast two funds that track the same sector.

So, with that housekeeping out of the way, let's turn our attention to this week's action:

Of course, things rarely happen according to schedule, plan or prediction. The Fed has maintained a slight bias towards hiking interest rates. The lending industry has been battered by substandard practices in the "subprime" space. And investors have shunned the sector.

Through the first 6 months of June, Financials represented the only major sector of the U.S. economy to lose ground. In fact, the S&P SDPR Financials Index (XLF) returned a dismal -1.12%.

Global Financial Sector ETFs
iShares S&P Global Financials Sector Index Fund (IXG)

The world's largest insurer, American International Group (AIG) continues to grow around the world, including areas such as Mexico and India.

These two companies help make up a portion of two insurance ETFs: PowerShares Insurance Portfolio (PIC) and iShares Dow Jones U.S. Insurance Index (IAK). PIC is up 5% year-to-date and Prudential makes up 5% of the holdings. IAK is up 6%, with AIG making up 23% of the ETF and PRU 7%.

First Trust AlphaDEX Sector ETFs
First Trust Consumer Discretionary AlphaDEX Fund (FXD)
First Trust Consumer Staples AlphaDEX Fund (FXG)
First Trust Energy AlphaDEX Fund (FXN)
First Trust Financials AlphaDEX Fund (FXO)
First Trust Health Care AlphaDEX Fund (FXH)
First Trust Industrials/Producer Durables AlphaDEX Fund (FXR)
First Trust Materials AlphaDEX Fund (FXZ)
First Trust Technology AlphaDEX Fund (FXL)
First Trust Utilities AlphaDEX Fund (FXU)

"The problem which PowerShares faces is that between them, Barclays and State Street basically cover all the tools that most investors need to build a diversified portfolio..., so PowerShares has to focus on slightly quirky ETFs," Mr. Jackson said.

The funny part comes at the very end, as the reporter poses his final question. “One last question, Bruce. If your fees are so low, how do you guys [PowerShares Capital Management] make money?” Bruce’s reply: “Well, uhm, you know–” and then poof! The video cuts out.