Make Money in Banks the Easy Way

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you expect big banks to grow in value in the coming years, the SPDR KBW Bank (NYSE: KBE) ETF 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 two dozen of them all at once.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The SPDR KBW ETF's expense ratio -- its annual fee -- is a relatively low 0.35%.

This ETF doesn't have the best record, but then again, the past few years have dragged most bank stocks into the gutter at some point. But that won't last forever, and many investors consider big-bank stocks significantly undervalued. According to Morningstar, the price-to-cash-flow and price-to-book-value multiples of the stocks the ETF owns are both well below the S&P's average. And in 2010, the ETF outpaced both its category and the S&P 500 by around 8 percentage points.

With a low turnover rate of 18%, this fund isn't frantically and frequently rejiggering its holdings, as many funds do. That'll give its holdings a better chance to perform.

What's in it?
Several of this ETF's components made strong contributions to its performance over the past year. Huntington Bancshares (Nasdaq: HBAN) rose 45%, while New York Community Bancorp (NYSE: NYB) advanced 33%. Huntington features a CEO with a decent-sized stake in the company and plenty of insiders buying shares. New York Community Bancorp offers a hefty dividend yield above 5%, and its admirers praise its strong management and smart acquisitions in the aftermath of the financial crisis.

Bigger banks in the ETF are also attractive. My colleague Alex Dumortier recently named Citigroup (NYSE: C) and Wells Fargo (NYSE: WFC) as some of the cheapest industry leaders. Citigroup has started reporting profitable quarters, and the U.S. Treasury has finished selling off its stake in the company. Wells Fargo has been beefing up its investment banking business and growing its market share in key areas.

The SPDR KBW Bank ETF isn't the only ETF that focuses on the financial sector. But its heavy focus on the biggest banks makes it particularly intriguing these days.

The big picture
A well-chosen ETF can grant you instant diversification across an industry -- and make investing in and profiting from the sector that much easier.

ETFs can help you find the way to better investing results. To find some great ETF investing ideas, take a look at The Motley Fool's special free report, " 3 ETFs Set to Soar During the Recovery ."