Bank of America Corp (NYSE: BAC) recently announced that it plans to lay off 3,500 employees, prompting some investors to worry that the US financial sector is weakening yet again.

Rather than a sign of weakness, these layoffs reflect the bank’s well-publicized plan to refocus on its core businesses after nearly a decade of misguided growth. In May, management unveiled the “New BAC” campaign, an effort that aims to cut expenses significantly. Bank of America has already slashed about 4,000 positions this year; the latest layoffs represent a continuation of this strategy.

A slimmed-down Bank of America will have a clearer growth strategy that emphasizes its traditional deposit and financial advisory businesses.

Banks also performed well in the second quarter. FDIC-insured banks earned $28.8 billion during this three-month period, up $7.9 billion from a year ago. This marked the eighth consecutive quarter of year-over-year earnings growth. A decline in loan loss provisions has been a major contributor to the sector’s turnaround.

In all, only 15 percent of insured banks reported net losses for the second quarter. (Unfortunately, Bank of America was one of those posting losses due to mortgage charges.)

Many banks also grew their deposit base significantly in the quarter. Total domestic bank deposits grew by $234.4 billion in the second quarter. Bank of America experienced 4 percent year-over-year deposit growth.

System-wide loan balances also grew for the first time in three years–up by a net $64.4 billion– as businesses and consumers took on new debt. Bank of America grew its loan balances by $102.2 billion, its fifth consecutive quarter of growth.

Finally, the number of banks on the FDIC’s “Problem List” fell for the first time in almost three years. Although the regulator doesn’t name the banks on the list, the agency revealed that the number of problem institutions fell by 23 to 865. Of these former problem banks, 22 were removed from the list because they failed. Nevertheless, it’s reassuring that banks’ balance sheets have improved to the point that the problem list is no longer growing.

Two more years of low interest rates will pose a challenge for the banks, though the industry could grow earnings by expanding loan books. With banks adhering to stringent lending standards, credit risk continues to decline.

Bank of America and the other megalenders will cope with low rates by focusing on their wealth-management operations and small-business relationships.

Given the generally positive industry trends, bank stocks appear increasingly attractive.

What’s New

Last week, Van Eck Associates launched Market Vectors Mortgage REIT Income (NYSE: MORT), which tracks an index of companies that generate at least half of their revenue from mortgage real estate investment trusts (REIT). The fund will hold about 25 different mortgage REITs.

Unlike other REITs that own and operate portfolios of properties, mortgage REITs originate or acquire whole mortgages or mortgage-backed securities. Although the leverage inherently involved in mortgage REITs boosts yields–the index tracked by the fund currently yields 14 percent–it also increases the fund’s sensitivity to interest rates.

In addition to leverage-related risks, the exchange-traded fund runs an extremely concentrated portfolio, with its top five holdings accounting for about 50 percent of its investable assets. Its position in Annaly Capital Management (NYSE: NLY) alone accounts for 21.7 percent of the portfolio. This top-heavy portfolio is a result of the funds capitalization-weighted construction.

The fund will charge an annual expense ratio of 0.40 percent, which is cheaper than the 0.48 percent charged by iShares FTSE NAREIT Mortgage REITs Index (NYSE: REM). Market Vectors Mortgage REIT Income ETF also offers pure-play exposure to mortgage REITs, while the iShares fund also holds shares of banks and other financials involved in the mortgage business.

Market Vectors Mortgage REIT Income is an attractive play on the sector if you’re willing to tolerate a good deal of volatility.

In addition to its new target-date fund, BlackRock also launched iShares MSCI Emerging Markets Small Cap Index (NYSE: EEMS). The new fund is hardly a novel idea–State Street’s S&P Emerging Markets Small Cap ETF (NYSE: EWX) and Wisdom Tree Emerging Markets Small Cap Fund (NYSE: DGS) have been around for a few years. BlackRock appears to be relying on its venerable iShares name to attract investors; there’s nothing unique about its index construction and the fund’s 0.69 percent expense ratio is comparable to similar funds.

Emerging-market funds that focus on small-cap stocks are in vogue among investors seeking pure-play exposure to these rapidly growing economies. Although large-cap companies tend to do business on a global scale, the fortunes of small-cap outfits tend to be more leveraged to local consumption. Large-cap emerging market funds also tend to overweight financials and energy and underweight consumer names. As a result, there are significant performance differentials between large-cap and small-cap emerging market funds. Fund that focus on small-cap stocks also tend to be much more volatile.

The new iShares fund is a solid option for investors seeking a complement to their large-cap exposure.

Portfolio Roundup

The Global ETF Profits portfolio declined by 4.5 percent last week but still outperformed both the S&P 500 and the MSCI EAFE Index. Our Income & Hedges positions made a positive contribution of 0.8 percent.

While there was little news directly affecting any of our individual portfolio holdings, only SPDR Gold Trust (NYSE: GLD) and iShares Barclays 3-7 Year Treasury Bond (NYSE: IEI) turned in positive performances, as equity markets around the world tumbled on broad economic concerns. Despite the weakness, we’re making no changes to any of our current recommendations.