Make Money in Recovering Financial Stocks the Easy Way

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you expect banks and financial services companies to get their acts together and thrive in the years ahead, the Vanguard Financials ETF (NYSE: VFH  ) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The financial ETF's expense ratio -- its annual fee -- is a low 0.27%.

This ETF has performed, well, dismally in recent years, lagging the S&P 500 considerably over the past five years. But it's still relatively young, and the future matters more than the past. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

With a low turnover rate of 10%, this fund isn't frantically and frequently rejiggering its holdings, as many funds do.

What's in it?
Few of this ETF's components have made strong contributions to its performance so far this year, but Annaly Capital Management (NYSE: NLY  ) and US Bancorp (NYSE: USB  ) kept its return from falling too much. Annaly is about flat in 2011, despite an astronomic dividend yield recently above 15%. It invests in real estate with borrowed money, and as long as interest rates stay low, it will be positioned to prosper. US Bancorp, down 3%, is favored by none other than Warren Buffett, and like many of its financial brethren, stands to gain when interest rates rise, as they'll eventually do. In the meantime, Buffett's partner Charlie Munger has referred to it as less "stupid" than other banks.

Buffett's Berkshire Hathaway (NYSE: BRK-B  ) , by the way, is another holding of the ETF, and shrunk by 2% since the beginning of the year. With operations in a wide variety of industries, it's positioned to do well as the economy recovers -- via its home-related businesses, railroad, furniture companies, and more.

Other companies truly hurt the ETF's 2011 returns. Aflac (NYSE: AFL  ) , down 21%, is a major insurer in Japan. It may see its supplemental insurance business grow as Japan's aging population puts pressure on its government-run health-care system. Bank of America (NYSE: BAC  ) , down a whopping 59% in 2011, has been working to improve its financial health, but faces some headwinds, such as a tarnished image in the eyes of many consumers.

The big picture
Demand for financial services isn't going away anytime soon. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.

Learn about the best dividend ETFs. And if you're looking for some great investments beyond ETFs, consider these 10 Stocks for Your Retirement Portfolio.

Longtime Fool contributor Selena Maranjian owns shares of Annaly Capital Management, but she holds no other position in any company mentioned. Click here to see her holdings and a short bio. The Motley Fool owns shares of Aflac, Berkshire Hathaway, Annaly Capital Management, and Bank of America. Motley Fool newsletter services have recommended buying shares of Aflac and Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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