With the U.S. economy hanging between loose and (looming) tight monetary policies, a quick peek at the backbone of the economy, the financial sector, seems mandatory. The sector, which makes up the around one-fifth of the S&P 500 index (SPY), emerged a winner in the Q2 earnings season, having tided over an average start to 2015 and a sluggish finish to 2014.

Several factors including fewer litigation charges, effective cost control measures and modest improvement in core businesses gave Q2 earnings a boost. The Zacks Earnings Trend also validated this uptrend especially on the earnings front.

Total earnings were up 7.3% on 1.6% revenue growth with beat ratios of 66.7% and 65.1%, respectively. The performance bettered what we saw from the finance sector companies in other recent quarters. Among the bunch, investment bankers and real estate segment delivered strong growth on both lines while major banks scored on the bottom line (read: Bullish Banking Earnings Drive Up These ETFs).

Not only this, the sector is due for more outperformance in the quarters to come. As per the Zacks Earnings Trend issued on September 4, 2015, the finance sector is expected to witness 8.6% earnings expansion in Q3 and 15.1% in Q4. Very few sectors are able to attain this envious growth rate especially given the even-increasing global growth concerns.

Overall, increased investment banking activity thanks to solid deals in the U.S. ranging from mergers and acquisitions to IPOs along with loan growth, sound trading business and cost containment efforts were behind the recent success.

Investors should note that the sector gained momentum despite the challenging interest rate backdrop. Since the Fed is likely to hike rates sometime this year, this corner of the market should soar on improving interest rate margins. This is because banks borrow money at short-term rates and lend the capital at long-term rates thereby benefiting from a widening spread between long- and short-term rates (read: Financial ETFs in Focus on Rising Rates Buzz).

Further, U.S. banks now have much healthier balance sheets and their quality of earnings is improving on a stepped-up economy. Given this, investors might look at the popular financial ETFs mentioned below and position their portfolio better prior to the Fed lift-off.

Financial Select Sector SPDR Fund (XLF)

The most popular financial ETF on the market, XLF follows the S&P Financial Select Sector Index. This fund manages about $17.5 billion in assets and trades in heavy volume of roughly 39 million shares a day. The ETF charges 15 bps in fees per year from investors. In total, the fund holds about 90 securities in its basket with the top five firms accounting for about 35% share. Other firms hold less than 2.77% of assets.

In terms of industrial exposure, the product is tilted toward banks at 36.9% while insurance, REITs, capital markets and diversified financial services account for a double-digit allocation each. The fund currently yields 1.88% in annual dividend and has lost 5.3% so far this year. The ETF has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook (read: Top Ranked Financial ETFs in Focus on Improved Outlook).
 
Vanguard Financials ETF (VFH)

This ETF is now home to $3.04 billion in assets. The product holds 563 stocks in its basket with highest allocations to Wells Fargo (WFC), J P Morgan (JPM) and Bank of America (BAC). Diversified banks is the key focus of the fund with about 24.3% exposure followed by regional banks (10.2%).

With an expense ratio of just 12 basis points, VFH is a cheap way of getting a diversified exposure to the financial services companies. The fund’s dividend yield is 1.92%. The fund is off over 6% in the year-to-date frame (as of September 8, 2015) and currently has a Zacks ETF Rank #1.

SPDR S&P Bank ETF (KBE)

This fund tracks the S&P Banks Select Industry Index and has an AUM of $2.7 billion. Volume is good as it exchanges more than 2 million shares a day while expense ratio is at 0.35%. The product holds a diversified basket of 65 stocks with none holding more than 1.74% of total assets (read: 4 Sector ETFs to Watch for Gains in 2015).

From a sector look, about three-fourths of the portfolio is allotted to regional banks while thrifts & mortgage finance, diversified banks, asset management & custody banks and other diversified financial services take the remainder. KBE currently has a dividend yield of 1.69%. The ETF has added 1.4% in the year-to-date time frame and holds a Zacks ETF Rank #2 (Buy).
 
SPDR S&P Regional Banking ETF (KRE)
 
This is yet another popular ETF in the banking space with AUM of nearly $2.31 billion and average daily volume of roughly 4.7 million shares. The product follows the S&P Regional Banks Select Industry Index, charging investors 35 basis points a year in fees.

The product holds a well-diversified basket of 93 stocks. It uses an equal-weighted strategy and hence minimizes concentration risk. None of the individual stocks form more than 1.45% of total fund assets. The fund has given more than 2% returns in the year-to-date frame. It has also a Zacks Rank #2.
 
iShares U.S. Financials ETF (IYF)
 
The fund looks to track the Dow Jones U.S. Financials Index and puts $1.48 billion of assets in 284 holdings. The fund is moderately spread out across each holding with the highest exposure of 6.38% going to Wells Fargo.
 
Banks is the top industry in the fund with about one-third of exposure followed by diversified financials (25%) and real estate (20.3%). The fund charges 45 bps in fees and yields about 1.52% annually (as of September 8, 2015). The fund has a Zacks ETF Rank #3 (Hold).
 
Financials AlphaDEX Fund (FXO)
 
The fund follows a modified equal-dollar weighted index and invests about $885.4 million of assets in 172 holdings. It is devoid of the company-specific concentration risk as no stock accounts for more than 1.29% of the basket.
 
Insurance gets the top priority in the fund with over 34% focus while REIT and banks also have double-digit exposure in it. The fund charges 80 bps in fees and yields 1.36% per year. The fund has lost about 1.5% so far this year and has a Zacks ETF Rank #3.
 
iShares U.S. Financial Services ETF (IYG)
 
This product follows the Dow Jones U.S. Financial Services Index, holding 112 stocks in its basket. It is highly concentrated on the top two firms – WFC and JPM – making up for over one-fifth of the portfolio. Other firms hold less than 7.72% share. Banks dominates the fund’s portfolio at 56% while financial services makes up for the remainder.

The fund has amassed $880 million in its asset base and sees moderate average daily volume of over 150,000 shares. It charges 45 bps from investors. The product has lost about 3% so far in the year and currently yields 1.34% in annual dividends. IYG has a Zacks ETF Rank #3.

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