Make Money in 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 banking industry to gain in value significantly as it continues digging out from its credit-crisis mess, the Financial Select Sector SPDR ETF (NYS: XLF) 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 very low 0.18%.

This ETF has performed ... well, badly. It has underperformed the world index over the past three, five, and 10 years -- though it's significantly ahead of that so far this year. It's the ETF's expected future performance that counts the most, though. And 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 7%, this fund isn't frantically and frequently rejiggering its holdings, as many funds do.

What's in it?
Several financial companies had strong performances over the past year. BB&T (NYS: BBT) gained 20%, posting above-average results in the Federal Reserve's stress test this past spring. One convincing sign that the bank's health is improving is its dividend, which recently yielded 2.7%. It was slashed some 68% in the credit crisis but is now 33% above that low. Big regional banks such as BB&T have been outperforming both huge megabanks and smaller local banks lately.

Other companies didn't do as well last year but could see their fortunes change in the coming years. Bank of America (NYS: BAC) , for instance, plunged 34% over the past year, and its quarterly dividend, which was virtually eliminated in 2008, falling from $0.64 to $0.32 to $0.01, remains at a penny. As my colleague Amanda Alix has noted, Bank of America is lagging its "fellow miscreants" when it comes to recovering from the foreclosure mess.

Meanwhile, life-insurance giant Prudential Financial (NYS: PRU) shed 21%. That includes a drop of about 10% in a single day in May, when the company reported disappointing earnings featuring a loss of nearly $1 billion on derivatives gone bad. Bears are worried about the company's debt level and some low and deteriorating numbers, such as net income and return on equity.

Custodial giant Bank of New York Mellon (NYS: BK) fell 23%, which has some seeing it as a good value now. The company has been cutting costs and boosting its assets under management, both of which bode well for future performance. Its dividend is on an upswing as well.

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.

The banking sector might still look like a mess, but it's nevertheless drawing the interest of some of the most successful investors, such as Warren Buffett. Check out our special free report, "The Stocks Only the Smartest Investors Are Buying," to be introduced to some compelling financial stocks.

At the time thisarticle was published Longtime Fool contributorSelena Maranjian, whom you canfollow on Twitter, holds no position in any company mentioned. Check out herholdings and a short bio. The Motley Fool owns shares of Bank of America and has adisclosure policy. We Fools don't 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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