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'd like to add some financial companies to your portfolio, the PowerShares Dynamic Financials ETF (NYSE: PFI  ) 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 PowerShares ETF's expense ratio -- its annual fee -- is 0.68 %. The fund is very small, too, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.

This ETF has underperformed  the world market over the past five years but outperformed it over the past three. 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.

Why financials?
If you expect the financial sector to do well over time as it recovers from the meltdown of several years ago, you might want to consider financial stocks for your portfolio. Remember, for example, how good banks are at levying fees and generating income, no matter what regulations are thrown at them.

More than a handful of financial companies  had strong performances over the past year. Regional bank Regions Financial (NYSE: RF  ) surged 56% and looks rather attractive on many counts, having repaid its TARP obligation, posting improving  financial numbers, and with a powerful presence in the growing  Southeast region. Some think that given its recent run, though, it's no longer quite a bargain. Another concern is that regional banks have recently been reporting lower demand  for business loans. Some of them have jumped into the profitable payday-loan business, for the high interest they can charge, but regulators are starting to take a closer look at that.

Fidelity National Financial (NYSE: FNF  ) , America's largest title insurance company, jumped 39%, buoyed  in part by a recovering housing market. (And as my colleague Dan Caplinger has pointed out, title insurers can do well when real estate prices are rising or falling, as long as sales are taking place.) Along with its peers, Fidelity National is also poised to benefit from a proposed rule from the Consumer Financial Protection Bureau.

CapitalSource (NYSE: CSE  ) gained 16%, providing financial services to small and medium-sized businesses. It has struggled some in our sluggish economy but has taken advantage of the down market to buy back many of its shares, boosting the value of remaining ones. Its shares outstanding numbered  about 321 million in 2010, and 260 million recently.

Other companies didn't do as well last year but could see their fortunes change in the coming years. MetLife (NYSE: MET  ) gained only about 1%, suffering from unenthusiastic interest in life insurance, domestically. The company aims to combat that, though, by focusing more heavily on fast-growing emerging markets and shedding less-productive businesses. It has announced  a new asset-management business, for example, and is offering prepaid life insurance packages through a partnership with Wal-Mart (NYSE: WMT  ) . Given that MetLife's recent P/E ratio was 5.4 and its industry's average was 14, it's worth a closer look.

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.

Many investors are scared about investing in big banking stocks after the crash, but the sector has one notable standout. In a sea of mismanaged and dangerous peers, it's The Only Big Bank Built To Last. You can uncover the top pick that both we and Warren Buffett love today in our new report. It's free, so click here to access it now.

Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, has no positions in the stocks mentioned above. The Motley Fool owns shares of CapitalSource. Motley Fool newsletter services recommend Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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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