ETF Trends
ETF Trends

In a persistently low interest rate environment, the financial sector’s outlook remains murky, but investors who still want some exposure to financials can consider exchange traded funds that produce decent yields.

Financial services firm Keefe, Bruyette & Woods advised clients to look into high-yielding financials, such as real estate investment trusts and dividend-paying banks when looking into the financial sector, reports Jeff Cox for CNBC.

For instance, the PowerShares KBW High Dividend Yield Financial Portfolio (NYSEArca: KBWD), which includes a 56.5% tilt toward financials and 41.6% toward real estate assets, including mortgage REITs, shows a 8.69% 12-month yield.

Alternatively, mortgage REITs-related ETFs offer some of the most attractive yields. For example, the Market Vectors Mortgage REIT Income ETF (NYSEArca: MORT) has a 10.1% 12-month yield and the iShares Mortgage Real Estate Capped ETF (NYSEArca: REM) has a 14.59% 12-month yield.

Looking at the financial market, KBW and others remain cautious over banks, citing increased regulatory restrictions and stubbornly low rates that will keep lending profits dampened. [A Tepid Year for Banks, Financial ETFs]

“While a number of factors have driven the underperformance, the primary factor has been the drop in government bond yields and market expectations for continued low interest rates,” KBW said in a note. “This has been augmented by reduced forward earnings estimates for interest rate sensitive financial stocks as analysts have not found offsets to lower interest rates, and lower margins, for many financial firms.”

Consequently, KBW argues that unless government bond yields rally, Wall Street may continue to fall behind.

“We believe this is likely unless bond yields move back to a sustainable level above 2 percent,” KBW added.

The financial sector has lagged the broader equities market. Over the past five years, the Financial Select Sector SPDR (NYSEArca: XLF) has returned an average annualized 13.5%, whereas the  SPDR S&P 500 ETF (NYSEArca: SPY) returned 16.4%.

PowerShares KBW High Dividend Yield Financial Portfolio

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