Despite all the bad news that has surrounded financial exchange traded funds (ETFs) lately, they’re continuing to rebound. Recently, NetBank and Miami Valley Bank of Lakeview, Ohio, went out of business. These closures made for a total of three bank failures for 2007, which is a lot considering there were zero bank closures in 2005 or 2006. On top of that, many financial stocks such as Citigroup (C), Merrill Lynch (MER) and Washington Mutual (WM) were down last week.

Yet looking at financial ETFs such as Financial Select Sector (XLF), KBW Capital Markets ETF (KCE) and WisdomTree International Financial (DRF), they’re all trending up. Year-to-date, XLF is down 1.5%, KCE is up 3.8% and DRF is up 9.5%.

A few possibilities behind financial ETFs’ rise, according to Kevin Baker for TheStreet.com, include:

• Since the dollar and the Canadian loonie are relatively equal now, Canada’s Toronto Dominion Bank (TD) bought Commerce Bank (CBH) which might have signaled a financial stock acquisition boom.
• There have been big write-offs at the end of the liquidity crisis.
• The yield curve has turned into a positive slope, which allows banks to pay less for short term deposits while using the funds for long-term loans.
• The Federal Reserve seems likely to cut rates again soon.

Tags: EWC, Federal Reserve, Financial, Sector ETFs