I'll admit: As a contrarian, Financials look pretty attractive. Not only is the sector down huge, but just about everyone has given up on it. People hate Financials; they think all the major banks are doomed; they're tarring the industry with a broad brush. That's the classic case for capitulation, and almost always the point where real money is made.

Jim Wiandt succumbed to that temptation this winter, when the Select Sector SPDRs - Financials (NYSE Arca: XLF) ETF was trading around $12/share. But Jim's case is telling: He subsequently lost 50% of his investment. I'd like to avoid that.

Still, I can't keep my eye off the sector. At some point, there has to be opportunity ... somewhere. What I'm wondering, however, is if a traditional equity ETF is the best way to play it.

The alternative would be to buy a preferred stock ETF, such as the iShares S&P Preferred Stock Index Fund (NYSE Arca: PFF) or the PowerShares Financial Preferred Portfolio (NYSE Arca: PGF). Preferred shares occupy a senior space in the credit ladder to common stocks. They pay a fixed dividend that is only reduced or canceled under extreme circumstances (which admittedly could be now).

PFF is about 80% exposed to the Financials sector, and holds only U.S.-listed securities. PGF is 100% Financials, but holds U.S. as well as international names. PGF is currently paying a 19% SEC yield, compared to 10.6% for PFF, according to PowerShares and iShares, respectively.

There's huge risk to these funds, and their "preferred protection" hasn't been much help over the past year. PGF is trading down 65% over the past 12 months, and PFF is down about 58%. Both are doing better than XLF, which is down 70%, but not by much. The market is clearly pricing in a fair amount of pain for preferred shareholders.

Still, there's reason to be hopeful. The government has been buying preferred shares in banks, so it has an implicit stake in maintaining the value of these preferred securities. In addition, foreign governments are large holders of preferred shares, and the U.S. government has an incentive to protect the investments of our foreign creditors.

I'm not quite settled on the issue, but think it's worth considering. (I'm not the only one: Morningstar has been writing extensively on this recently.) 

I think it's likely (although by no means certain) that preferred shares continue to outperform traditional equities if the market stays tough for Financials. And even if the clouds clear, a case could be made. 

Let's suppose that the clouds lift a little on Financials: Not enough to clear the runways for strong profit growth, but enough to let the industry limp along for a few years in recovery mode. In that scenario—where survival is clear but success unlikely—preferred shares should do very well. 

There's no free lunch in Financials. The risks are huge and the waters are dark. But preferred shares are at least worth thinking about.