Here's an Easy Way to Profit From Small and Busy Financial Companies

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you want to invest in some small financial companies, for example, expecting the financial industry to thrive over the long run due to our need for its services, the PowerShares S&P SmallCap Financials ETF (NAS: PSCF) 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 a very low 0.29%. 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 performed well, beating the world market over the past year, but it's also too young to draw many conclusions about. 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 13%, this fund isn't frantically and frequently rejiggering its holdings, as many funds do.

What's in it?
Several small financial companies had strong performances over the past year. Prospect Capital (NAS: PSEC) , up 27%, is a private-equity business development company, specializing in energy companies, and recently yielding a whopping 10.7%. It has posted double-digit average annual revenue and earnings growth over the past three years.

The fourth-largest bank in Pennsylvania, Susquehanna Bancshares (NAS: SUSQ) , gained 29%. It has been snapping up many other companies over the years, with two major acquisitions in the past year: Abington Bancorp and Tower Bancorp. The company has projected tens of millions of dollars in expected cost savings from these purchases as well as organically -- investors should keep an eye on the company to see if these materialize.

F.N.B. Corp. (NYS: FNB) , also based in Pennsylvania, gained 8%. It was one of the top-performing regional banks in 2011, and it, too, has been gobbling up other banks, with nine acquisitions since 2002. It has been growing its loans, deposits, assets, and earnings faster than its peers' median rate over the past few years. It's growing in Pittsburgh, and management recently pointed out that it's well positioned to benefit from the increase in energy-producing activity at the Marcellus and Utica shale fields.

Other companies didn't do as well last year, but could see their fortunes change in the coming years. Medical Properties Trust (NYS: MPW) , for example, shed 10%. It's a real estate investment trust, or REIT, that specializes in health-care-related properties and also offers financial services and mortgages to health-care entities. Recently yielding 8.3%, it plans to beef up its acquisitions, aiming for four new hospitals per year.

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.

If you're hankering for some financial stocks, check out our special free report, "The Stocks Only the Smartest Investors Are Buying," which will introduce you to a promising regional bank -- and some other compelling financial companies, as well.

At the time thisarticle was published LongtimeFool 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 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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