The Financial Select Sector SPDRs (Ticker: XLF) corrected 36.80% from its May 31^st, 2007 intraday high to its January 22^nd, 2008 intraday low. Any such sizeable correction begs the question if the time is ripe to “lock and load” financials or if it’s best watch from a distance.

A quick snapshot:

Sub-prime credit woes causing massive losses, declining real estate prices, seven rate cuts (despite rising inflation) since September 2007 (0.50% on Sep 18 2007, 0.25% on Oct 31 2007, 0.25% on Dec 11 2007, 0.75% on Jan 22 2008, 0.50% on Jan 30 2008) have turned the spotlight to financials.

Big name institutions are selling at P/E levels and dividend yield ratios not seen for years or perhaps at any time prior. One would think that if the lows are not in the rear view mirror they should be close enough so that any further price deterioration will be quite limited.

Overweighing underperforming sectors (as part of an asset allocation model) and vice versa is commonly viewed as a conservative investment strategy. Following this strategy one would automatically be overweight in financials at this time.

However, many investors have the behavioral tendency to avoid underperforming industry sectors and to throw hot money into areas with upside momentum.

Since their intraday low of $24.11 on January 22^nd, XLF has already recouped about 20%. The “big spike” might already be over. The seven interest rate cutes clearly indicate that the economy is in trouble and despite all the fanfare surrounding rate cuts investors realize it may not be enough.

There still is plenty of potential of additional mortgage related losses that will have to be absorbed by large banks and financial institutions. Given the sad state of the economy though, financials might actually outperform the overall markets.

Below are 16 ETFs that provide exposure to the various forms of the US financial sector. All but the ProShares UltraShort Financials (Ticker: SKF) benefit from rising prices.

Some ETFs track their own quantitative or proprietary indexes. The performance of such custom indexes can differ significantly from established & passive indexes (like S&P or Dow Jones).

Case in point, the PowerShares Dynamic Financials Sector Portfolio (Ticker: PFI) lost only 1.01% in 2007 while the iShares Dow Jones US Financial Sector ETF (Ticker: IYF) was down 17.94%.

That does not mean that the performance of quantitative or proprietary indexes is worse than their passive counterparts. You simply may be surprised (positive or negative) when their performance numbers don’t match up with what you expected based on the widely know indexes.

Table of financial ETFs: