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 Financial Select Sector Fund ETF

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

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, 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.

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