ETFs are disparate in that they have different rules for re-balancing of holdings, discretion of holdings, focus, etc., and some are more liquid than others, writes Andrew Hart for ArticlesCollection. Recent changes in market capitalization have also affected weightings of holdings in the sector, too. [Four investing rules to follow.]

Hart has compiled a small sampling of the available financial sector ETFs and the diversification and top holdings of the funds to illustrate this point:

• iShares Dow Jones U.S. Financial Sector (NYSEArca: IYF). Top 10 holdings are 37.9% of assets. Top three holdings: JPM 10%, WFC 5.58%, GS 4.28%.
• iShares Dow Jones U.S. Financial Services (NYSEArca: IYG). Top 10 holdings are 57.7% of assets. Top three holdings: JPM 15.7%, WFC 8.76%, GS 6.72%.
• iShares S&P Global Financials (NYSEArca: IXG). Top 10 holdings are 24.4% of assets. Top three holdings: JPM 4.3%, HSBC 4.25%, WFC 2.58%.
• Financial Select Sector SPDR (NYSEArca: XLF). Top 10 holdings are 51.2% of assets. Top three holdings: JPM 12.34%, WFC 10.34%, BAC 5.45%.
• Vanguard Financials ETF (NYSEArca: VFH). Top 10 holdings are 36.9% of assets. Top three holdings: JPM 8.2%, WFC 7.26%, BAC 5.02%.
• Rydex S&P Equal Weight Financials (NYSEArca: RYF). Top 10 holdings are 17% of assets. Top three holdings: SLM 2.15%,MS 1.92%, FII 1.78%.
• PowerShares FTSE RAFI Financials (NasdaqGM: PRFF). Top 10 holdings are 48.2% of assets. Top three holdings: JPM 11.15%, WFC 8.59% BRK/B 6.34%.
• First Trust Financials AlphaDEX (NYSEArca: FXO). Top 10 holdings are 14.5% of assets. Top three holdings: WRB 1.85%, AWH 1.6%, PRE 1.47%.
• PowerShares Dynamic Financials (NYSEArca: PFI). Top 10 holdings are 25.7% of assets. Top three holdings: AMP 3.12%, MET 2.85%, UNM 2.71%.

The sampling shows that ETFs like IYG, XLF, and PRFF have around 50% of holdings in their top 10 assets, which means diversification is a little lower. Furthermore, IYG has a large weighting in its top two securities and could be significantly swayed by those two companies alone. Then, there are those that have made an attempt at equal weighting, with the top holdings making up around 15% of assets.

The distribution of companies held within an ETF is not a question of right or wrong, but what works for you. Do you want a heavier weighting in the top securities? Or would you prefer more of an even distribution among all the components?

Price performance disparities in ETFs based on holdings and diversification may arise once the market settles and if arbitrage start to affect ETF prices. Investors should take the time to examine holdings, structure and goals of the ETF they are interested in for the time frame they have in mind. [(How to find out where an ETF's holdings are based.]

For more on ETF investing, visit our ETF 101 category.

Max Chen contributed to this article.

After Citigroup (C) announced that it was making money in the first two months of the year, some other major financial institutions, like Bank of America (BAC), JP Morgan Chase (JPM) and HSBC Holdings, also broke out in a show of strength and rode the ensuing wave of optimism, reports David Gaffen for The Wall Street Journal. Bank shares are up more than 40% since last week.

Looking at the fundamentals, borrowing costs have dramatically declined with federal-fund rates being greatly cut down, which allow banks to borrow for basically nothing, and banks are able to receive funds from the Federal Reserve. Furthermore, banks are still able to lend at higher rates, and that is where their profits are coming.

Improvements are also coming through with normalized hedging strategies and wider bid-offer spreads because of a reduced number of companies facilitating trades. It is thought that that ongoing deterioration in loan quality and expectations of more write-downs will impede regular banking in the future.

Wells Fargo (WFC) and a growing list of other bankers are vexed by restrictions imposed by the TARP program, which has affected lending, foreclosures, pay, and job perks, writes Ari Levy for Bloomberg. Now, some just want return the money. Wells Fargo had to reduce dividends by 85% to 5 cents a share and it made a quarterly payment of $371.5 million for interest on the $25 billion TARP investment.

The government is now going forth with a “stress test” to see which of the 19 largest U.S. banks need more capital. It is believed that the test will protect the banking system and help see that the necessary capital is provided for a more sound financial system.

Meanwhile, the regional banking sector has been side-stepping much of the tumult lately.

• SPDR Financial (XLF): up 18.9% in the last week; up 7.3% in the last month; BAC is 5.5%; JPM is 12.3%; WFC is 10.3%

• iShares Dow Jones U.S. Financial Sector Index Fund (IYF): up 16.6% in the last week; up 4.2% in the last month; BAC is 2.9%; JPM is 10%; WFC is 5.6%

• Rydex Equal Weight Financials (RYF): up 13.9% in the last week; up 0.9% in the last month

Read the disclosure, as Tom Lydon is a board member of Rydex Funds.

Max Chen contributed to this article.

The focus on TARP funds and the governments around the globe has been to save the “too big” to fail financial institutions and not focus on smaller banks, often the more sound banks, and the exchange traded funds (ETFs) that track them.

Not All Are Bad. There are some financial institutions out there that have relatively clean balance sheets, didn’t overextend themselves by issuing bad loans and aren’t involved in credit card nightmares. The beauty of these banks is that they can borrow for free, don’t have to offer much, if any, of a return on customer deposits, and can lend with a rate of 6% to 11%. Sounds like a winner doesn’t it? The problem arises on a bank’s willingness to take risk via sound lending standards and that qualified borrowers want to borrow, states Gary Gordon at ETF Expert.

Tricky Playing Financials. For ETF investors, playing the financials is a bit challenging because most of the indexes are market-cap weighted. If investing in the Financial Select SPDR (XLF), which is down 25% over the last month, one is mostly investing in the largest financial institutions.

This predicament may be alleviated through the use of Rydex Equal Weight Financials (RYF), which is a fund that tracks small, medium and large financial companies in equal proportion. It’s not down as sharply as some of the other financial ETFs – 12.3% over the last month.

Less Exposure. Regional banks also had less exposure to toxic assets that brought the industry to its knees in 2008. the KBW Regional Bank (KRE) was down 20.9% in 2008, compared with the 56.8% decline seen in the Financial Select Sector SPDR (XLF) in the same time frame.

It still seems like an uphill battle for the financial sector and the sector is far from flashing a green light. However, if one still desires to play financials, a more diversified index might be an option.

Read the disclosure, as Tom Lydon is a board member of Rydex Funds.

He said that while the inflation outlook is uncertain, the recent decline in commodity prices and the stabilization of the U.S. dollar are encouraging signs, report Mark Felsenthal and Alister Bull for Reuters. If this sticks, he says, inflation should be moderate both this year and next.

All hints suggest that Bernanke will keep interest rates steady for the time being.

Oil is down $3 so far today, thanks to a stronger dollar and profit taking after Thursday’s jump, reports Bate Felix for Reuters.

Financials also found themselves on surer footing following the news that Lehman Brothers may have attracted a major investor, according to Ellis Mnyandu for Reuters. Warren Buffett also spoke on television that he has no bets against the U.S. dollar, and he also expressed confidence that the government would take steps to support Fannie Mae and Freddie Mac.

Among the ETF leaders in early trading include:

• PowerShares FTSE Rafi Financial (PRFF), down 31.1% year-to-date
• iShares Dow Jones U.S. Broker Dealer (IAI), down 37.7% year-to-date
• Rydex S&P Equal Weight Financial (RYF), down 27.6% year-to-date
• Financial Select Sector SPDR (XLF), down 29.7% year-to-date

Read the disclaimer, as Tom Lydon is a board member of Rydex Funds.

JP Morgan (JPM) said it had racked up bigger losses in its mortgage holdings so far in the third quarter than in the second quarter, reports Tim Paradis for the Associated Press. Goldman Sachs then came out with lowered ratings and earnings estimates for the investment bank.

Meanwhile, UBS (UBS) said it would separate its investment bank from its wealth management arm. The banker admitted that there were problems with keeping both businesses integrated, say John O’Donnell and Sam Cage for Reuters. UBS lost $41 billion in the second quarter, as rich clients moved their money to rivals that include smaller Swiss banks.

Oil fell slightly to below $113 a barrel, buffeted by differing views on whether global demand is up or down, and tension between Russian and Georgian troops.

The U.S. trade deficit unexpectedly dropped as exports hit an all-time high. The deficit of $56.8 billion is the smallest in three months, and better than the $61.5 billion Wall Street had forecast, reports Martin Crutsingrer for for the Associated Press.

The markets over all and most financial-related ETFs are down in trading this morning:

• KBW Bank (KBE), down 18.1% year-to-date
• iShares Dow Jones U.S. Financial Services (IYG), down 21.5% year-to-date
• Vanguard Financials (VFH), down 18.4% year-to-date
• Rydex S&P Equal Weight Financial (RYF), down 20.1% year-to-date

Read the disclaimer, as Tom Lydon is a board member of Rydex Funds.

But coming off news of July’s rebound is a round of news this morning that seems to have things picking up for the sector once again. We reiterate, though, what while things do seem to be picking up, investors would be wise to wait until this sector once again travels above its trend line before jumping back in.

• UBS (UBS) reached a $19.4 billion agreement to buy back bonds, reports the Associated Press. It’s the biggest settlement yet after claims that banks misled investors to buy auction-rate securities. Yesterday, Citigroup (C) agreed to buy back $7 billion of such securities, while last week, Merrill Lynch (MER) said it would buy back $12 billion of them.

• Fannie Mae (FNM) posted a second-quarter loss that was three times what Wall Street had expected. The $2.3 billion loss is blamed on rising defaults and foreclosures, and it has forced the mortgage giant to make cutbacks, reports Alan Zibel for the Associated Press. The good news is that Fannie Mae predicts the worst of it will be over by the end of this year. But it still cautions investors that losses could still remain through the current quarter as it tries to unload foreclosed homes and restructure loans.

• MBIA (MBI) notched a $1.7 billion profit in the second quarter, wildly beating analyst estimates. But the world’s largest bond insurer is having trouble getting new business since losing its top debt ratings, reports Christopher Kaufman for Reuters.

ETFs that are feeling the better vibes this morning include:

• Rydex S&P Equal Weight Financials (RYF), down 24.5% year-to-date
• Financial Select Sector SPDR (XLF), down 25.4% year-to-date
• First Trust Financials AlphaDEX (FXO), down 19.8% year-to-date
• iShares Dow Jones US Financial Sector (IYF), down 23.1% year-to-date

Read the disclaimer, as Tom Lydon is a board member of Rydex Funds.

It was his second day of testimony about the state of the ailing U.S. economy. It was less downbeat than yesterday’s testimony. Bernanke said the two mortgage giants, which hold or guarantee more than $5 trillion in mortgages, were adequately capitalized, reports Jeannine Aversa for the Associated Press.

The rescue plan seemed to rattle nerves, but the intent was to signal to investors around the world that the government is prepared to do whatever it takes to keep the credit crisis from engulfing the financial markets.

Shares for Wells Fargo (WFC) delivered a shot of good news today, reporting a profit drop that was not as big as had been expected. Its quarterly dividend was up by 10%, as well, reports Madlen Read for the Associated Press. Many other financial institutions are slashing their dividends in order to preserve capital.

The San Francisco-based bank has weathered the storm better than its rivals, partially because it didn’t have as much exposure to subprime mortgages.

Bernanke’s assurances and Wells Fargo’s numbers combined to make unleveraged financial ETFs the superstars in today’s markets, including:

• Regional Bank HOLDRs (RKH): down 42.3% year-to-date; Wells Fargo is 13.7%
• KBW Bank (KBE): down 43.7% year-to-date; Wells Fargo is 9.3%
• iShares Dow Jones U.S. Regional Banks (IAT): down 39.3% year-to-date
• KBW Regional Bank (KRE): down 38.1% year-to-date
• Rydex S&P Equal Weight Financial (RYF): down 37.7% year-to-date; Wells Fargo is 13.7%