Pay attention to the financial sector.
The technology sector is getting a lot of attention lately, and for good reason. The high growth potential of big-name stocks like Amazon.com (ticker: AMZN) and Netflix (NFLX) is obvious. But while not quite as dynamic, the finance sector is the No. 2 grouping in the S&P 500 over the last year with an impressive return of 18 percent or so. The future looks bright for the banks, insurance companies and investment firms thanks to recent regulatory reform and hopes that higher interest rates will boost margins. Investors wanting to target this sector should consider these nine exchange-traded funds.
Vanguard Financials ETF (VFH)
The most basic way to play the recent Dodd-Frank reforms is this broad-based and low-cost ETF from Vanguard. By casting a wide net across more than 400 financial stocks, the fund gives you a little bit of everything in the sector. However, it’s worth noting that the fund is weighted toward the biggest stocks with about 30 percent of its assets in JP Morgan Chase & Co. (JPM), Bank of America Corp. (BAC), Wells Fargo & Co. (WFC) and Citigroup (C). These stocks are undeniably the big dogs in finance, but the reliance on a small group of picks is still noteworthy.
Invesco KBW Bank ETF (KBWB)
If you’re really after a focused play on major diversified banks, then why bother with a fund that includes 400-some holdings? The KBWB instead owns just 24 — taking the big guys and similar mainline financials, including SunTrust Banks (STI) and Capital One Financial Corp. (COF), to give a focused play on actual banks. If you’re really interested in Dodd-Frank’s impact, this could be a better way. The KBWB only invests in full-service banks.
SPDR S&P Regional Banking ETF (KRE)
If you like focusing on banks but aren’t comfortable with KBWB’s small list of holdings, then consider looking beyond the big guys to smaller, regional players. This SPDR fund offers access to these names, including Texas Capital Bancshares (TCBI) and First Republic Bank (FRC). It also regularly rebalances so that no single pick in its 120 holdings grows to represent too much of the portfolio. In many ways a local banking outfit is a more direct play on economic growth and lending trends. The strength of the U.S. economy has helped lift this fund to a more than 8 percent return year-to-date.
Invesco S&P 500 Equal Weight Financials ETF (RYF)
Speaking of an “equal weight” fund, RYF applies this approach to regional banks, the big players like Bank of America and everything in between. No single investment is significantly more important than another. And with 69 holdings across mainline banks, insurance companies and capital markets players, you truly have a diversified approach to the financial industry. As a one-stop shop to play the sector without bias toward a specific segment or a small group of specific stocks, RYF is a great catch-all.
First Trust Financials AlphaDEX Fund (FXO)
Many active investors are fine with putting their eggs in one basket, cutting out bad stocks and putting their cash behind the good ones. That’s what the RXO fund aims for, billing itself as an enhanced index fund based on a hand-picked grouping of financial stocks instead of a passive and fixed list. Its methodology involves ranking financial stocks based on “price appreciation, sales to price and one-year sales growth, and, separately, on value factors including book value to price, cash flow to price and return on assets.” The rub is that even a more selective approach may not protect you from trouble in the sector.
SPDR S&P Insurance ETF (KIE)
Instead of chasing the highest fliers in finance, another approach is to take a defensive stance with insurance stocks. If you’re optimistic about deregulation and the prospect of higher interest rates increasing returns for companies with a lot of cash on the books, the subsector of insurance has good upside but more stability than other flavors in finance. This fund offers variety within insurance, with big names like Progressive Corp. (PGR) and Metlife (MET), as well as smaller, specialized players like Assured Guaranty (AGO), which mainly insures municipal bonds.
iShares U.S. Preferred Stock ETF (PFF)
Another lower-risk way to play financials but still tap into the promise of deregulation is preferred stock, a hybrid asset between stocks and bonds that typically isn’t accessible to small-time investors. With $16 billion in net assets, however, PFF can tap into this investment class. Preferred stock is far less volatile than common stock, so you shouldn’t expect much upside in share prices. However, with an annualized yield of about 5.7 percent at present, you will get rewarded with regular and substantial distributions. More than $7 of every $10 in this fund is allocated to banks, insurers and other financials.
iShares Global Financials ETF (IXG)
While there are a lot of reasons to depend on U.S. financials given Dodd-Frank reforms and U.S. central banking moves, it’s worth remembering how interconnected the global economy has become. IXG offers a global approach to banking and finance. Top U.S. banks like JPMorgan have a big share, but so do powerhouses like U.K.-based HSBC Holdings (HSBC) and the Royal Bank of Canada (RY). True, deregulation in the U.S. won’t have as direct an influence on some of these holdings. But as with some of the other funds on this list, investors who want to hedge their bets may find comfort in the geographic diversification.
Direxion Daily Financial Bull 3X Shares (FAS)
In the eyes of a few aggressive traders, diversification is overrated. Why bother with 10 different kinds of investments when you can just pick one and ride that investment sky high? That’s what this “leveraged” Direxion fund offers, with a strategy that aims to deliver three times the return of the typical financial ETF. The downside is if your bet on financials happens to be wrong, you’re saddled with three times the losses. So think long and hard about just how much confidence you have in financials before you dive headfirst into this aggressive ETF.
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9 Bank ETFs to Invest in Finance Reform originally appeared on usnews.com
