Although many investors shudder at the mention of the word, the financial sector will one day be in favor again. The financial services sector has been a standout, reports Money and Markets on iStock Analyst.

• iShares Dow Jones U.S. Financial Services (NYSEArca: IYG): up 21.6% year-to-date

The rally may not be indefinite, since banks still have their share of problems. But there’s still opportunity there, since financial ETFs are still about 50% off their 2007 highs. (Play the capital markets recovery).

There are about 34 ETFs that track the financial sector, including:

• SPDR Select Sector Financial (NYSEArca: XLF): up 23.7% year-to-date

• iShares Dow Jones U.S. Financial (NYSEArca:  IYF): up 20.5% year-to-date

• Vanguard Financials (NYSEArca: VFH): up 18.8% year-to-date

XLF is focused exclusively on large-cap financial stocks. IYF and VFH own some smaller companies as well, but all three are well-diversified within the financial sector.

Make sure that you are well educated on market trends and follow the trend lines, especially as times are tenuous for financial companies as they work to get their books back in order. We follow the 200-day moving average as both the entry and exit point. This eliminates any emotional interference and keeps losses to a minimum. Read more about trend following in The ETF Trend Following Playbook.

For more stories about the financial sector, visit our financial category.

Bank of America (NYSE: BAC) reported a $1 billion loss for the third quarter. Consumer credit issues canceled out any earnings from investment banking. Bank of America received two bailouts amounting to $45 billion and has yet to start repaying it, reports Joe Rauch for Reuters.

• iShares Dow Jones U.S. Financial Services (NYSEArca: IYG) is down nearly 2.5% so far today; Bank of America is 12.1%

General Electric (NYSE: GE) reported lower profits, but better-than-expected figures overall. The company’s strength in the industrial and media sectors helped offset the woes in its financial division. Third-quarter earnings fell 42%, which is less than what analysts had feared, reports Bob Sechler for The Wall Street Journal.

• WisdomTree Equity Income (NYSEArca: DHS) is down about 1.5% this morning; GE is 8.1%

Industrial production rose more than analysts predicted last month. Production at factories, mines and utilities rose 0.7% in September. This follows gains of 1.2% in August and 0.9% in July, reports Shobahna Chandra for Bloomberg.

Consumer sentiment is down, however. The index tracking how consumers are feeling fell to 69.4 from 73.5 last month.

Financial exchange traded funds (ETFs) have gained more than 100% off the March 9 market low, but the Federal Deposit Insurance Corporation (FDIC) reported that banks lost $3.7 billion in the second quarter in bad loans made to homebuilders, commercial real estate developers and small- and mid-size businesses, reports Eric Dash for The New York Times.

Deposit insurance fund dropped to $10.4 billion, a 16-year low. “Problem banks” have increased from 305 in the first quarter to 416. The decline in deposit insurance comes from money set aside to cover bank failures, but the reserves are so low that officials are considering a special assessment on banks, not counting elevated insurance fees, by the end of the third quarter.

Banks have cut out $48.9 billion, or 2.6% of assets, most of it tied to rising corporate and commercial real estate losses as well as write-offs on short-term debt and a jump in troubled credit card loans. Early trend signs show that quarterly increases in loan losses are slowing.

Federal bank regulators are anticipating hundreds of small- and medium-size banks to collapse in the coming months, and more money is being used to prevent losses. Federal officials warned the sector that a rebound won’t come soon and analysts say a recovery will come when the job market and broader economy stabilize.

• iShares Dow Jones U.S. Financial Services (IYG): up 18.7% year-to-date

• SPDR Financial Select Sector (XLF): up 19.4% year-to-date

• Regional Bank HOLDRs (RKH): up 5.7% year-to-date

For more information on financials, visit our financial category.

Max Chen contributed to this article.

According to Megan Barnett at Minyanville they did, now they now are trying to catch up to smaller banks and foreign firms.  Major firms such as Goldman Sachs (GS), Bank of America (BAC) and JP Morgan (JPM) are on a hiring binge and some think that this might not be the greatest idea because things haven’t changed drastically for the sector in the last few months.

In fact, the watchdog of the Troubled Asset Relief Program (TARP) released a report Tuesday morning suggesting that the $700 billion bailout has done little to relieve banks of their troubled assets.  Additionally, many banks have reason to worry about the quality of some of their assets shrinking even more. Loan quality has decreased in the last 18 months as good creditors go bad while the few good borrowers pay down their loans.

The banking sector is starting to stabilize, but this doesn’t mean that it’s in the clear. Some ETFs that may be influenced by the outlook of the financial sector are the following:

• SPDR Financial Select Sector (XLF): up 12.1% year-to-date; JPM is 12.5%; BAC is 10.6%; GS is 6.8%

• iShares Dow Jones U.S. Financial Services (IYG): up 12.9% year-to-date; JPM is 14.1%; BAC is 11.1%; GS is 6.8%

• Regional Bank HOLDRs (RKH): up 2.2% year-to-date; JPM is 23.4% and BAC is 5.8%

For more news on the financial sector, visit our financial category.

Kevin Grewal contributed to this article.

The S&P 500 is a major benchmark which can help to measure the importance of a sector based upon the number of companies represented within the index. At the market’s all-time high on Oct. 9, 2007, financials were 20.1% of the index’s market value, the largest of any of the 10 major sectors.

More than a year later, financials now only represent 10.5% of the S&P 500, reports Tom Petruno for The LA Times. Last Tuesday, the sector’s share of the index briefly dipped to 9.6% – the first time its weighting was in single digits since 1992.

The smaller an industry’s representation in the index, the less significant it is in moving the index day to day, up or down. As financials have dried up, sectors that have grown within the index include health care at 15.5%, energy at 14.1%, and technology at 16.2% (now the largest weighting). Are financials worthy of the mere seventh place mark, only ahead of basic materials, telecom and utilities?

• SPDR S&P 500 (SPY): down 7.3% year-to-date

As banks are still suffering losses incurred by failing mortgages, credit cards and auto loans, and questionable corporate debt, can TARP funds actually be the answer? TARP funds have been used to stem the bleeding in failing and healthy banks alike, but the fact remains that no one knows how far housing prices will drop and how many loans will ultimately fail, remarks Jay Hancock for The Baltimore Sun.

At the end of the line, after the guarantees, aggregator banks, and commercial banks have all done their parts and the Treasury has put a floor under banks’ losses, it is the taxpayer who will suffer and pay the losses from the bonds to the banks. So, given that financial services are putting that on us right now, their seventh place within the S&P 500 is actually generous.

• iShares Dow Jones U.S. Financial Services Index Fund (IYG): down 31.4% year-to-date

The expectation is that more banks are likely to fail as the number of troubled banks and thrifts rose in the third quarter from 117 to 171, report John Poirier and Karey Wutkowski for Reuters.

FDIC reserves to back deposits was $24.6 billion as of September, up 23.5% from the previous year. FDIC classified banks with a problem was up 46%, the highest since 13 years prior, due to the beat up banking system. FDIV regulator disclosed there are 171 problem banks as of September 30, with 117 for the second quarter, marking a large shift, reports Alison Vekshin for Bloomberg. Banks are measured upon asset quality, earnings and liquidity.

AIG (AIG) has announced that they are limiting how much they pay their top executives, thus far granting a $1 salary for this year and the same for the fiscal year 2009 to Chief Executive Edward Libby. So far, AIG has received the most Federal bailout funds at $150 billion, causing the pressure to mount as the public scrutiny rises, reports Leva M. Augustums for Associated Press. This is one of the broader moves made by AIG.

The news could cheer investors and the general public, both of whom had expressed outrage that the bailout money would go to salaries and bonuses. AIG joins other institutions that have taken similar steps, including Goldman Sachs, UBS and Barclays.

• iShares Dow Jones US Financial Services (IYG): down 56.4% year-to-date; down 17.7% in the last month

• SPDR KBW Regional Banking (KRE): down 22.5% year-to-date; up 1.6% in the last month

Lawmakers agreed to the deal, and now the vote is being put to Congress. President Bush urged for a quick approval, report Carl Hulse and David M. Herszenhorn for the New York Times. The House is expected to vote today, and the Senate will vote later this week.

Meanwhile, the fever of the financial crisis doesn’t appear to have broken yet. Citigroup (C) stepped forward today to acquire the banking operations of Wachovia (WB). Citigroup will absorb $42 billion of losses from Wachovia’s $312 billion loan portfolio, the Associated Press reports. The deal will cement Citigroup’s place among the Big Three, along with Bank of America  (BAC) and J.P. Morgan Chase & Co. (JPM).

Fannie Mae (FNM) and Freddie Mac (FMC) are being subpoenaed for documents as part of grand jury investigations into their accounting, Reuters reports. The FBI said it is expanding its investigation of possible corporate fraud to Fannie, Freddie, Lehman Brothers and American International Group.

The bailout and eventual resolution to this crisis is a long way away. As things get worse, it only underscores how much recovery we have ahead of us, and how much work the next president will have cut out for himself.

One expert says that the recovery from this crisis will dominate the agenda of the next president for two years.

The primary features of the bailout include buying troubled mortgage securities, restraints on executive pay, shareholder stake in firms that sell large amounts of bad debt to the government, and a mandate that the government act aggressively to prevent more foreclosures, reports Steve Lohr for the New York Times.

The markets are down sharply this morning, and financial ETFs are taking a hit:

• Financial Select Sector SPDR (XLF): down 24.8% year-to-date
• Vanguard Financials (VFH): down 20% year-to-date
• iShares Dow Jones U.S. Financial Services (IYG): down 21.6% year-to-date; Wachovia is 7.1%
• Regional Bank HOLDRs (RKH): down 11.2% year-to-date; Wachovia is 10.1%

JP Morgan Chase (JPM) is buying the bank’s assets for $1.9 billion after the FDIC seized the bank, reports Madlen Read for the Associated Press. WaMu is the largest bank to fail in the country’s history. Its $307 billion in assets eclipses that of the second-largest bank to fail, Continental Illinois National Bank, which had $40 billion in assets when it went under in 1984. IndyMac had $32 billion when it was seized by the government in July.

Since the assets have been sold to JP Morgan, it prevents the bank’s collapse from draining the FDIC insurance fund.

Wachovia (WB) and National City Corp (NCC) shares fell on the worries, as well.

Bailout talks have hit a snag, as there are disagreements over some aspects of the rescue plan, report Julie Hirschfeld Davis and Charles Babington for the Associated Press. President Bush issued a statement saying that while lawmakers can express their doubts, they must work to prevent an economic meltdown.

The U.S. economy grew less strongly than believed during the second quarter, as consumers spent less and businesses trimmed investments, says Glenn Somerville for Reuters. Gross Domestic Product (GDP), which is the measure of total goods and services output within the United States, expanded 2.8% from April to June instead of the estimated 3.3%.

ETFs hit today include:

• KBW Regional Banking (KRE): up 1% year-to-date
• Vanguard Financials (VFH): down 22.4% year-to-date
• iShares Dow Jones U.S. Financial Services (IYG): down 24.3% year-to-date; Wachovia is 7.1%
• Regional Bank HOLDRs (RKH): down 14.2% year-to-date; Wachovia is 10.1%

Lehman Brothers Holdings (LEH) filed for bankruptcy protection, Merrill Lynch (MER) was forced to sell to Bank of America (BAC) for $50 billion in stock, reports Tim Paradis for the Associated Press. Meanwhile, American International Group Inc. (AIG) is asking the Federal Reserve for emergency funding.

The developments squashed any hopes that the collapse of Bear Stearns in February was the worst of the 14-month long crisis.

The events this weekend happened after frantic round-the-clock negotiations, as bankers met to try and avoid a downward spiral in the markets, says Andrew Ross Sorkin for the New York Times. Ten major banks pulled together and agreed to create an emergency fund of $70 billion to $100 billion, which financial institutions can pull from in order to protect themselves from the fallout of Lehman’s failures.

Financial ETFs are taking a beating this morning:

• Financial Select Sector SPDR (XLF), down 26.7% year-to-date
• iShares Dow Jones U.S. Financial Services (IYG), down 25.8% year-to-date
• iShares Dow Jones U.S. Broker-Dealers (IAI), down 40.5% year-to-date
• KBW Insurance (KIE), down 20.2% year-to-date

Given the troubles

Some might even end the week slightly higher, if the early morning performance is any indication.

Lehman’s shares are continuing to fall as the investment bank races to find a buyer, reports Joe Bel Bruno for the Associated Press. Confidence about whether Lehman is going to emerge from this crisis as an independent franchise is on the wane. Meanwhile, Treasury Secretary Henry Paulson is adamant that there will be no use of federal funds in whatever deal emerges for Lehman.

How will the week end for these ETFs? Here are the numbers so far:

• Financial Select Sector SPDR (XLF): down 24.6% year-to-date; up 2.2% in the last week
• ProShares UltraShort Financials (SKF): up 12.8% year-to-date; down 5.5% in the last week
• iShares Dow Jones U.S. Financial Services (IYG): down 24.4% year-to-date; up 2.8% in the last week