Financial exchange traded funds are outperforming the market on strength in bank stocks and hopes the economic recovery is hitting escape velocity.

Financial Select Sector SPDR (NYSEArca: XLF) followed the broader market lower on Friday but is up about 13% so far this year, compared with a gain of roughly 8% for the S&P 500. The banking sector was the market’s punching bag last year, however, as the financial ETF lost about 17%. [Sector Rotation Favors Riskier ETFs]

On Thursday, the U.S. government and banks concluded a foreclosure settlement pact that will settle federal and state inquiries on alleged foreclosure abuses, lifting a cloud that has been detracting wary investors, according to the Wall Street Journal.

“It is frankly a headline victory for both banks and attorneys general with a modest impact on the housing market,” Joshua Rosner, managing director of investment firm Graham Fisher & Co, said in the article.

GMAC Mortgage said it “makes every effort to work with borrowers and avoid foreclosure whenever possible,” and that “as a general practice, the company exhausts all home ownership preservation options with borrowers needing assistance.”

Top financial ETF holding Bank of America (NYSE: BAC) is trading above $8 for the first time since the summer.

Other sector funds up more than 10% in 2012 include:

  • iShares Dow Jones U.S. Financial Sector Index Fund ETF (NYSEArca: IYF)
  • iShares Dow Jones U.S. Financial Services Index Fund ETF (NYSEArca: IYG)
  • SPDR KBW Bank ETF (NYSEArca: KBE)

SPDR Financial Select Sector Fund ETF

For more information on the financial sector, visit our financials category.

Max Chen contributed to this article.

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