Financial exchange traded funds (ETFs) have been on the caution list for many investors, however, the recent sell-off mixed with historical patterns associated with financial sector outperformance during economic slowdowns are making these more attractive. Jonathon Bernstein for ETFZone reports that when the extent of financial losses becomes more clear in 2008, there may be good reason to rethink financials.  Some points Bernstein makes include:

• Higher Earnings Financial sector earnings are expected to be lower in 2007 but come back in 2008.
• Lower Rates The fear of a recession has the Feds cutting interest rates. A falling rate environment helps financial ETFs as the market value of fixed income assets increase.
• Financials Oversold History shows the markets always tend to oversell financials and bounce back the following year.
• The freeze on ARM resets Subprime bond portfolios will benefit from this possibly more than borrowers; since the plan does not help all borrowers.
• Lack of subprime germs to other markets For consumers the subprime contagion hasn’t spread into other markets like automobile loans, and credit cards.

There is a huge pool of financial focused ETFs to choose from. They range from sector-focused, strategy, leveraged and short as well as broad based – here are a few with year-to-date performanc:

• Vanguard Financials (VFH) down 15.1%
• KBW Bank ETF (KBE) down 17.1%
• PowerShares Dynamic Financials (PFI) down 2.5%
• ProShares Ultra Financials (UYG) down 37.7% since February inception
• WisdomTree International Financial Sector Fund (DRF) up 1.1%

Tags: Financial, Sector ETFs