While the outlook for interest rates (and bonds) has become decidedly more cloudy, there is a silver lining: higher long-term interest rates are generally good for banks and other financials. Coupled with a strengthening economy and improving housing market, a favorable rate spread should be the icing on the cake for the US financial sector.

The yield on 10-year Treasuries has in two months climbed to a 22- month high (around 2.7 percent). Yet shorter-term rates, over which the Federal Reserve has much more control, have hardly budged. What’s more, long rates could rise further in anticipation of the Fed’s exit from the bond market, leading to a steeping of the yield curve.

This is good news for banks, since it means they can borrow at relatively low short-term rates and lend at higher long-term rates, dramatically boosting their net interest margin (NIM).

Data from SNL Financial shows that banks’ NIM have been squeezed the past four years due to historically low rates. NIM fell from an aggregate 3.7 percent in fourth-quarter 2009 to 3.3 percent in first-quarter 2013. As a result, banks’ earnings growth has been coming from cost-cutting and efficiencies, not their lending operations.

Like banks, most Real Estate Investment Trusts (REITs) play the yield curve by borrowing short and lending or investing long. In the case of mortgage REITs, rising yields typically mean that the value of their assets is falling, but widening NIMs, coupled with lower mortgage prepayments, drive improved profitability.

Insurers also will get quite a bit of relief, since they’ll be able to invest premiums collected in high-quality bonds that are now yielding more.

Big Bank Hunting

Vanguard Financials ETF (NYSE: VFH) is an inexpensive way to gain broad exposure to US financial companies. VFH lost almost half its value in the 2008 financial crisis. In the past three years, however, this ETF has rebounded, although its five-year return remains subpar. We think more gains are likely as long as the economy doesn’t start to weaken again.

Despite being invested in more than 500 US companies, VFH is concentrated: more than a third of its $1.3 billion in assets is in the top 10 holdings. And 21 percent of assets is in four money-center banks: Wells Fargo (NYSE: WFC) and JP Morgan Chase (NYSE: JPM) are the two top holdings, at around 6 percent each, followed by Bank of America (NYSE: BAC) and Citigroup (NYSE: C), close to 5 percent each.

REITs are 22 percent of assets, including shopping mall investor Simon Property Group (NYSE: SPG), healthcare investor HCP (NYSE: HCP) and American Tower (NYSE: AMT). And another 21 percent is devoted to insurers, such as the new and hopefully improved American International Group (NYSE AIG) and MetLife (NYSE: MET).

Finally, 18 percent is allocated to diversified financials, such as Berkshire Hathaway (NYSE: BRK.B) and American Express (NYSE: AXP). VHF isn’t all giant stocks, however; about a third of the holdings are small and mid-cap companies.

Since it replicates the MSCI US Investable Market Financials 25/50 Index, VFH isn’t likely to outperform the US financial sector, and its concentration in money center banks makes it more volatile.

Still, this ETF is a good way to invest in the continued recovery of the US financial sector, while capturing a 2.1 percent yield.