There are a lot of exciting new funds in the ETF market. When are we going to see bond sector funds?

If there's one thing we've learned over the past few years, it's that sectors matter. For the 12 months ending January 31, 2009, the spread between the top- and bottom-performing sectors in the S&P 500 was nearly 50%: Consumer Staples was down 16.87%, while the Financials sector was down 66.78%. The choice of over- or underweighting one sector or the other made all the difference to your returns.

Fortunately, in the equities market, investors have had a wide variety of sector and subsector ETFs to express their opinions. You can capture something as broad as Technology or as narrow as the airline industry.

But in bonds? We're stuck with the traditional dichotomy of investment grade vs. high yield. That's useful, but not fine-pitched for the current environment.

It strikes me that a Financials bond ETF would be particularly attractive. I'm guessing that there are a lot of investors who think that the bonds of major financial companies are attractive at these levels; I'm also guessing that there are a lot of investors who would love to short financial bonds and remove that risk from their portfolios. A Financials bond ETF would make that possible.

Maybe I'm overreacting to a temporary market phenomenon. The potential returns on corporate bonds are so high right now that a lot of investors are replacing their equity exposure with fixed income. Maybe I'm just wishing we had the same kind of choices in the fixed-income market that we do in equities.

But I think there's both real demand and real utility here. Just look at the huge inflows into the three preferred stock ETFs.

Preferred stock is a stock/bond hybrid that pays high dividends and sits halfway between equities and debt in the capital structure. In bankruptcy proceedings, common stockholders are wiped out before preferred stock shareholders, who in turn are wiped out before bond holders. Buying preferred stock, therefore, gives you some but not all of the protective benefits of buying actual bonds.

Financial companies are the leading issuers of preferred stock, and the three preferred stock ETFs hold mostly financial securities. With yields pushing toward 15%, these ETFs have attracted nearly $500 million in net inflows in January alone. Just think what an actual Financials bond ETF might do.

BTW: For those of you expecting me to follow up on my Monday blog with some thoughts on the liquidity issues surrounding USL, you'll have to wait: I'll post that analysis on Friday. There are a few more facts and figures that I'm in the process of gathering.