Make Money in Recovering Bank Stocks -- the Easy Way

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you expect the financial sector to recover and be a solid grower over the coming years, as our growing population will doubtlessly continue to need financial services, the iShares Dow Jones U.S. Financial Sector ETF (NYS: IYF) 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 iShares ETF's expense ratio -- its annual fee -- is a relatively low 0.47%.

This ETF has not been the most spectacular long-term performer, partly due to the sector's meltdown during the credit crisis a few years back. On average it has underperformed the S&P 500 over the past five- and 10-year periods, but as the sector is recovering, it has outperformed the S&P 500 so far this year. 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 very low turnover rate of 8%, this fund isn't frantically and frequently rejiggering its holdings, as many funds do.

What's in it?
Several financial companies posted positive results over the past year. BB&T (NYS: BBT) , for example, gained 17%. PNC Financial (NYS: PNC) gained 4% -- and both banks passed a recent stress test, though only BB&T posted stronger-than-average numbers. BB&T boasts a strong balance sheet, stayed in the black during the credit crisis, and paid back its TARP funds early. PNC will likely be fined for its part in a recent "robo-signing" foreclosure scandal, but it also appears healthy, hiking its dividend aggressively.

Other companies didn't do as well last year, but they could see their fortunes change in years to come. Bank of America (NYS: BAC) , down 28%, is another bank paying for the robo-signing debacle. It's one of several big banks agreeing to a $25 billion settlement with many states. Dealing with a tarnished reputation domestically, it's boosting its presence in Asia and other regions and stands to benefit from a rise in interest rates, which is inevitable at some point. Bank of New York Mellon (NYS: BK) , down 19%, is an interesting beast, focusing more on providing custodial services for other financial institutions than on serving individual consumers. It's also not as affected by banking reforms due to that.

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 "5 ETFs That Could Soar in 2012." And if you're looking for some great investments beyond ETFs, consider these "12 Dividend Stocks for 2012."

At the time thisarticle was published Longtime Fool contributorSelena Maranjian, whom you canfollow on Twitter, holds no position in any company mentioned.Click hereto see her holdings and a short bio. The Motley Fool owns shares of PNC Financial Services Group and Bank of America. The Motley Fool has adisclosure policy.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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