Exchange traded funds that invest in preferred shares and regional banks have been leading the recent gains in the financial sector.

Over the past week, SPDR S&P Bank ETF (NYSEArca: KBE), PowerShares KBW Bank Portfolio (NYSEArca: KBWB), SPDR S&P Regional Banking (NYSEArca: KRE) and iShares DJ US Regional Banks (NYSEArca: IAT) are among the top-performing unleveraged ETFs, gaining 4% or more.

Additionally, preferred stock ETFs such as iShares S&P U.S. Preferred Stock (NYSEArca: PFF), which sport attractive dividend yields, have made a move to the upside to start 2012. The funds have heavy sector concentrations in the financials. [Bank Rally Lifts Preferred Stock ETFs]

In regional banks, the ETFs are challenging their highest level since early 2011. Some options traders have been using call options on the ETFs to position for a rally in the sector. [ETF Chart of the Day: Regional Banks]

Smaller regional banks have been outperforming their large-cap brethren in recent months. The first chart below shows the ratio of the SPDR S&P Regional Banking ETF against the large-cap SPDR S&P Bank ETF.

SPDR S&P Regional Banking

iShares S&P U.S. Preferred Stock

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.