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.

Since the market lows on March 9, financials have rebounded handsomely, up as much as 140% since then. Most of them are perched firmly above their 200-day moving averages, as well.

There are a variety of ETFs that cover the sector. Because of the sector’s high profile, it is essential to know exactly what is under the hood of these ETFs.  The sector can be  subdivided into the following: broad-based, regional banks, capital markets, insurance and REITs.  John Gabriel of Morningstar breaks down the sector and provides an in-depth analysis of industries that constitute the financial sector.

The most widely held and common financial ETFs are broad-based financials, which include the SPDR Select Sector Financial (NYSEArca: XLF) and the Vanguard Financials (NYSEArca: VFH). Banks constitute nearly half of the asset base of XLF and 42% of VFH, insurance companies account for nearly 18% of XLF and 22.5% of VFH and capital markets soak up about 19% of both XLF and VFH.

In regard to the banking sector, some common ETFs investors look at are the SPDR KBW Bank (NYSEArca: KBE) and the PowerShares Dynamic Banking (NYSEArca: PJB). KRE is heavily exposed to banks operating in the Pacific region, nearly 25% of its assets, whereas PJB holds about 6% of its assets in this region.  Additionally, KRE is the only regional bank ETF which doesn’t hold stakes in large money center banks, whereas 10% of PJB’s assets are allocated to this specialty.

As for capital markets, investors can grab exposure to exchanges alongside brokers, money managers, and former investment banks through the SPDR KBW Capital Markets (NYSEArca: KCE) and the iShares Dow Jones US Broker-Dealers (NYSEArca: IAI). Both funds are nearly identical, except that KCE includes a sampling of traditional asset managers in its mix.

When it comes to insurance, investors can grab exposure through the PowerShares Dynamic Insurance (NYSEArca: PIC), SPDR KBW Insurance (NYSEArca: KIE) and the iShares Dow Jones U.S. Insurance (NYSEArca: IAK). The major difference between these ETFs mainly lies in their exposure to life insurers.  PIC has 3% of its assets to the subindustry, whereas KIE and IAK have 22% and 23% allocated to life insurers, respectively.

As for real estate investment trusts (REITs), the most common ETFs include the iShares Dow Jones U.S. Real Estate (NYSEArca: IYR) and the Vanguard REIT Index (NYSEArca: VNQ). A big difference between these two ETFs is that IYR contains mortgage REITs and unconventional holdings such as timber REITs and real estate services firms while VNQ limits itself to primarily conventional REITs.

In addition to knowing what an ETF holds, we suggest one watch the trendlines and have a strategy as this sector continues its recovery, as well.

For more stories on financials, visit our financial category.

Kevin Grewal contributed to this article.

Despite Monday’s advances, the technical picture looks weak for financial companies, says  Michale Kahn for Barron’s. Kahn explains that putting money into your bank account may be a better bet than putting money into banking stocks. Is it true?

A weak sector may look enticing and cheap to investors, and many investors who are feeling encouraged by Goldman Sachs’ (GS) stellar earnings report might be wondering if it’s time to wade back in.

To be sure, financials have made good strides since the March 9 market lows. Some ETFs are up 80% and 90% or more since then. However, most of these ETFs still remain below their long-term trend lines. Our strategy is to focus on those areas that have crossed above this point.

Earnings season is only just beginning – can other banks that have yet to report match Goldman Sachs’ earnings? A clearer picture of this sector will emerge by the end of the week. Upcoming earnings include: J.P. Morgan Chase (JPM) tomorrow and BB&T (BBT), Citigroup (C) and Bank of America (BAC) on Friday.

• iShares Dow Jones U.S. Financial Sector (IYF): down 6% year-to-date

• Financial Select Sector SPDR (XLF): down 4.7% year-to-date

• Vanguard Financials (VFH): down 7.6% year-to-date

For more stories about financials, visit our financial category.

Some of the dividend-focused ETFs are so diversified that they could stand in as core holdings for a portfolio, remarks Paul Justice for Morningstar. When considering a dividend paying stock or ETF, the objective is to think growth over the long-term. Dividend investing is all about finding solid dividend stocks that are reasonably priced and are expected to continue raising their dividends in the future, explains Dividends4Life on iStock Analyst.

Do not confuse dividend investing with searching for high-yielding stocks to generate a high income. A majority of the time, the quality ones will not have outrageous yields, however the growing dividends over time could compensate.

Here is a small sample of dividend-paying ETFs. Note that this is not all-inclusive, and there are may other worthy ETFs delivering dividends to choose from:

• Vanguard Financials (VFH): yields 5.9%; down 5.2% year-to-date
• PowerShares International Dividend Achievers (PID): yields 6.2%; up 3.4% year-to-date
• SPDR S&P Dividend ETF (SDY): yields 6.4%; down 1.1% year-to-date
• SPDRS (SPY): yields 3.3%; up 1.4% year-to-date
• WisdomTree LargeCap Dividend (DLN): yields 4.8%; down 4.5% year-to-date
• Industrial Select Sector SPDR (XLI): yields 4%; down 2.3% year-to-date
• Diamonds Trust, Series 1 (DIA): yields 3.9%; up 2.8% year-to-date
• iShares S&P 100 (OEF): yields 3.7%; down 0.9% year-to-date
• iShares NYSE 100 (NY): yields 3.8%; down 2.9% year-to-date
• Rydex Russell Top 50 (XLG): yields 3.6%; down 1.6% year-to-date

Investors are feeling a bit empowered after the $20 billion shot in Citigroup’s arm and the $306 billion guarantee for risky assets, reports Tim Paradis for Associated Press. Had Citigroup’s share price remained below the key $5 mark, it could have led to a new wave of selling.

Obama has also chosen his financial team and given some hope to the markets, calling in another economic stimulus.

His plan targets saving or creating 2.5 million jobs during the next two years. Any plan is expected to exceed the $175 billion Obama proposed during the campaign.

• iShares Dow Jones U.S. Financial Sector Index Fund (IYF): down 61.7% year-to-date; Citigroup is 4.8%

• Vanguard Financials (VFH): down 60.8% year-to-date; Citigroup 5.1%

On the home front, the nationwide sales of homes fell 3.1%, a number larger than anticipated. The economy and its weakness has made borrowers wary, despite prices falling to their lowest level in five years.

Sales of existing homes fell 3.1% to a seasonally adjusted annual rate of 4.98 million units in October, from a downwardly revised pace of 5.14 million in September, reports Alan Zibel for Associated Press. Sales in the Western region of the nation remain up, as buyers in Las Vegas and Orange County are buying distressed properties at bargain prices.

Nationwide, estimates are that sales of distressed properties made up 45% of all property sales in October.

• iShares Dow Jones Cohen and Steers Realty Majors Index Fund (ICF): down 59.4% year-to-date

• SPDR DJ Wilshire REIT (RWR): down 57.7% year-to-date

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%

Gouldman Sachs (GS) said that it has received $5 billion in a common stock offering as part of a plan that also includes an investment of at least $5 billion by investor Warren Buffett, reports Stephen Bernard for the Associated Press.

This is just days after Goldman got the go-ahead to convert into a bank holding company instead of an investment bank. By doing so, both Goldman and Morgan Stanley (MS) avoided the fate of Bear Stearns and Lehman Brothers.

The FBI has gotten involved with an investigation into the companies at the heart of the meltdown of the U.S. economy, says Lara Jakes Jordan for the Associated Press. The bureau is looking at potential fraud by mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE), along with American International Group (AIG) and possibly Lehman Brothers.

With these four firms added to the mix, the total number of inquiries taking place right now totals 26.

Lawmakers in Washington are still considering the bailout package.

Financial ETFs are trading mixed this morning:

• Financial Select Sector SPDR (XLF): down 27.9% year-to-date; AIG is 4.1%; Morgan Stanley is 2.6%
• iShares Dow Jones U.S. Broker-Dealers (IAI): down 42.2% year-to-date; Goldman is 10.9%; Morgan Stanley is 8.7%
• Vanguard Financials (VFH): down 22.8% year-to-date; AIG is 3.1%; Goldman is 3.1%

Although today was a better one than a few of the others seen this week, with all this stomach-churning volatility, you almost have to wonder who is in the financial sector right now. As we’ve pointed out before, these funds are about 50% off their highs, which were reached earlier last year.

Despite announcements of a government bailout plan that will be fleshed out this weekend, there are no assurances yet that this crisis is over. No one can predict whether yet more banks will fall, or if this is all just the beginning of the end to this more than year-long mess.

The largest financial ETF, Financial Select Sector SPDR (XLF), has exposure to some of the biggest names in the news this week, including Bank of America (BAC). The fund has $7.7 billion dollars and is 47.4% off its high reached on June 1, 2007. It’s down 34.8% year-to-date.

iShares Dow Jones US Broker-Dealers (IAI) is down 51.2% since its June 15, 2007, high and is down 48.7% year-to-date. Lehman Brothers is a major holding in this fund, with 4.3% of the assets, and it has $163 million in assets.

KBW Bank (KBE) is down 40.4% off its Feb. 26, 2007, high and is down 25.2% year-to-date. It has $1.1 billion in assets.

Vanguard Financials (VFH) counts American International Group (AIG) as a top holding, with a 3.9% weighting in the insurer. It’s down 41% since hitting a high on Feb. 26, 2007, and is down 30% year-to-date.

We heartily advocate sticking to a plan – even more so in times like these when everything is so uncertain. We’ve seen it all week: a day with a more than 500-point loss, followed by a day with a huge jump, followed by a day with another big loss. Investors who stuck to the plan and chose to watch from the sidelines until the trends turn positive should be feeling decent right now.

Well, not so fast. The government’s plan isn’t fully fleshed out. They’ll be working through the weekend to work out the deatils of what could be the biggest bailout in U.S. history.

Treasury Secretary Henry Paulson said they had been acting on a case-by-case basis when it came to Freddie Mac, Fannie Mae and AIG. This morning involved taking even more powerful steps to boost confidence in the system, reports Graham Bowley for the New York Times.

Meanwhile, the Treasury has said it will guarantee money market funds up to $50 billion to ensure their solvency.

Paulson defended the cost to taxpayers, saying that it would get to the root cause of the entire problem. Allowing more market turbulence would be even more costly than this bailout plan.

Will it all work? So far, the reaction to the rumors seems to point to this being the beginning of the end, says one expert.

Investors are eager to see the bottom, but sticking to your strategy is the safest move you can make for now. When these areas being trending up again, they’ll eventually cross their 200-day moving average, meaning financial ETFs will be worth considering for your portfolio. Until then, it’s impossible to say whether the volatility we’ve seen this week is going to continue.

• Financial Select Sector SPDR (XLF), down 34.8% year-to-date
• iShares Dow Jones US Broker-Dealers (IAI), down 48.7% year-to-date
• KBW Bank (KBE), down 25.2% year-to-date
• Vanguard Financials (VFH), down 29.7% year-to-date