The best fit financial ETFs.
Any investor wanting to cheerlead for the U.S. economy should have a stake in financial stocks. The stronger America’s economy grows, the more business there is for banks. And any signs of economic strength only improve the odds that the Federal Reserve will hike rates — another boon for banks and insurance companies. But considering how difficult it is for most investors to analyze banks’ balance sheets, the best route for many is investing in many financial stocks simultaneously via an exchange-traded fund. Here are the 10 best financial ETFs:
#10: iShares U.S. Broker-Dealers & Securities Exchanges ETF (ticker: IAI)
The IAI’s connection to strong economic growth is pretty obvious. Broker-dealers like Goldman Sachs (GS) and stock exchanges like the Nasdaq (NDAQ) both make money on fees attached to equity trades, and generally speaking, you’ll get a lot more of that on the back of a stronger economy. This fund is as niche as it sounds, with just 25 holdings, and it’s top heavy, too. Goldman takes up 10 percent of the fund, and the top five — which includes Goldman rival Morgan Stanley (MS) — make up nearly 45 percent.
Expenses: 0.43 percent
#9: iShares U.S. Insurance ETF (IAK)
Insurance companies are a pretty direct play on interest rates. In short, insurers typically are expected to benefit from higher rates. That’s because insurance companies typically invest policyholder premiums in bonds, and higher rates not only help them earn more money on their investments, but they also make their products more attractive when marketing to new clients. The IAK is a slightly broader fund, but it’s still very top heavy, with top holdings American International Group (AIG) and Chubb (CB) each comprising more than 10 percent.
Expenses: 0.43 percent
#8: First Trust Nasdaq ABA Community Bank Index Fund (QABA)
Community banks are considered to be among the better 1-2 punches in financials. These stocks tend to be underappreciated, thanks to the sparse analyst coverage they get, but they’re also potent plays for mergers and acquisitions. Financial analyst Richard Bove thinks 2016 could be a banner year in small-bank mergers as regional firms try to ensure their own survival. QABA holds 150 Nasdaq-listed banks, but excludes any of the nation’s top 50 by asset size to ensure a much smaller-firm focus.
Expenses: 0.6 percent (with fee waiver through April 30)
#7: iShares U.S. Regional Banks (IAT)
This iShares offering has a somewhat similar focus as QABA … in name, anyway. But practically speaking, IAT provides a much different experience in that it holds more “super-regional” banks, and it’s highly overweight in these stocks thanks to market-capitalization weighting. Top holding U.S. Bancorp (USB) is the nation’s fifth-largest bank in terms of assets, and takes up a whopping 18 percent of the fund’s weight. Fellow large regional PNC Financial (PNC) is at nearly 12 percent.
Expenses: 0.43 percent
#6: Guggenheim S&P 500 Equal Weight Financials ETF (RYF)
If the idea of heavy exposure to just one or two stocks (like IAT) bothers you, equal-weight funds like the RYF make a lot more sense. Stocks are equally weighted upon rebalancing, so a hit to any one stock in the fund won’t send your investment into the toilet. RYF is a diversified financial ETF that includes not just banks, but insurers, real estate investment trusts, stock exchanges and other financial service stocks. Currently, Realty Income Corp. (O) and Nasdaq have floated to the top of RYF’s holdings list.
Expenses: 0.4 percent
#5: PowerShares KBW Bank ETF (KBWB)
The KBWB is a straightforward fund that provides exposure to both national and regional banks, so this fund will be pretty sensitive to interest rate movements. The top five holdings are the country’s top five banks by assets — so, the big four Bank of America Corp. (BAC), Wells Fargo & Co. (WFC), JPMorgan Chase & Co. (JPM) and Citigroup (C), along with U.S. Bancorp — and make up nearly 40 percent of the fund. All told, there’s not much breadth, either, with just 24 holdings.
Expenses: 0.35 percent
#4: Financial Select Sector SPDR ETF (XLF)
The XLF is the largest financial ETF at $16 billion compared to $3.4 billion for second-place Vanguard Financials ETF (VFH). It’s also an odd hybrid that bundles real estate investment trusts with traditional financials like banks and brokerages. Recent changes in the Global Industry Classification Standard that defines sectors actually caused State Street to create two separate ETFs — Financial Services Select Sector SPDR ETF (XLFS) and Real Estate Select Sector SPDR ETF (XLRE). Not wanting to lose those assets, however, XLF was kept alive.
Expenses: 0.14 percent
#3: Fidelity MSCI Financials ETF (FNCL)
Fidelity’s FNCL is a slightly cheaper, more diverse version of the XLF. FNCL holds nearly 550 stocks compared to just 90 for XLF, though as far as industry balance goes, the two funds are pretty similarly constructed. The only differences of note are a significantly higher weighting in REITs and a lower concentration in diversified financial services for FNCL. Top holdings include Wells Fargo, JPMorgan and Berkshire Hathaway (BRK.B), though their individual weightings are each smaller in FNCL than they are in XLF.
Expenses: 0.12 percent
#2: SPDR S&P Insurance ETF (KIE)
The big difference between KIE and the other insurance ETF on this list (IAK) is that the former is equal weighted, so you don’t get the huge single-stock imbalance that you do with IAK. Otherwise, it mostly comes down to industry concentration. On this front, KIE is actually lighter in the core industries of life and health insurance and property and casualty insurance, as well as multi-line insurance, but focuses much more heavily on reinsurers like Everest Re Group (RE) and insurance brokers like Aon plc (AON).
Expenses: 0.35 percent
#1: Vanguard Financials ETF (VFH)
Vanguard’s financial offering is the second-largest financial fund out there at $3.4 billion, and it’s also the cheapest on this list at just 10 basis points annually. VFH is similar to XLF and FNCL in that it’s a big, blended financial ETF that throws REITs into the mix. Of particular note is that the Vanguard ETF’s top 10 holdings are identical to FNCL’s in order and sport extremely similar weights. With all else being nearly equal, VFH gets the nod thanks to its dirt-cheap expenses.
Expenses: 0.1 percent
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The 10 Best Financial ETFs You Can Buy originally appeared on usnews.com
