Bank stock prospects are looking up.
Though the Federal Reserve didn’t raise interest rates in July, the long-term trend toward higher rates is clear. Key rates were near zero in December 2015, but there were seven increases since. Signs point to another increase in September, too. Rates are also on the rise overseas, with strong employment and the beginnings of inflation across the U.K. Wall Street has been expecting higher rates for some time and bank stocks whose profits rise and fall with interest rates are looking up. If you’re planning to get into the financial sector during this push for rate increases, these nine exchange-traded funds can do just that.
Financial Select Sector SPDR Fund (XLF)
With more than $31 billion in assets, the XLF is one of the most popular ETFs. It features the biggest names in the sector, with about 45 percent in mainline banks, 20 percent in publicly traded companies that focus on capital markets and another 17 percent in insurance stocks. Since this fund is market cap-weighted, the big guys pull most of the weight: JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC), Wells Fargo & Co. (WFC) and Citigroup (C) represent almost 40 percent of the entire fund. To play the financial sector, it’s hard to argue against a big stake in those big names.
Invesco S&P 500 Equal Weight Financials ETF (RYF)
If having all your eggs in one basket worries you a bit, consider the Invesco “equal weight” financials fund that holds almost 70 different companies and aims for equal portions through regular rebalancing. Values ebb and flow with the market, but right now no single stock represents more than 1.7 percent of the portfolio for a truly diversified approach to financials. This means less focus on traditional banks, with the fund split pretty equally between insurance, capital markets and mainline banks. But for a less top-heavy approach, the RYF is worth a look.
iShares U.S. Financial Services ETF (IYG)
What if you don’t want to worry about subsectors within the financial industry and want to get right at banks lending money at higher rates or earning more interest on the assets they have on hand? Then consider UYG, which cuts out insurers and other tangential plays to zero in on the banking and lending industry. There are non-bank companies among the 114 holdings, such as credit card giant American Express Co. (AXP) and asset manager Goldman Sachs Group (GS). But as financial services companies, their fates are tied to interest rates. This may be a better slice of the sector for some investors.
Invesco KBW Bank ETF (KBWB)
Another different and more focused play on financials is the KBWB, which has a tight list of 24 holdings that includes national and regional banks. The goal is simple: take the biggest U.S. financial stocks, and presume they represent the lion’s share of the industry. It’s not a bad plan since it cuts out complexity. If one stock makes a big move, there’s a good chance the ETF will make a big move since it’s closely tied to a small list of companies. However, the strategy cuts both ways. Investors should be aware this approach limits diversification and has risks if one or two of those companies go south.
SPDR S&P Regional Banking ETF (KRE)
Another strategy is to shun the big guys and go regional. After all, large banks like JPMorgan are complex and span such a wide global marketplace that it’s hard to ascribe success or failure on one trend like rising rates. Regional banks, though, are smaller and exclusively domestic — and perhaps more likely to see an impact. Some of the components are no small potatoes, such as SunTrust Banks (STI) and KeyCorp (KEY), which each top $20 billion in market value. But like the equal-weight fund from Invesco, KRE employs rebalancing to ensure even the smaller regional banks players are well-represented.
SPDR S&P Insurance ETF (KIE)
While much of the talk about rising rates centers on banks and deposits, it’s important to keep in mind other financial stocks also benefit. Chief among these are insurance companies, which take premiums paid by customers and invest in low-risk assets until needed to pay a claim. They aren’t allowed to risk losing that money in volatile investments like stocks, so they have a lot tied up in interest bearing assets like U.S. Treasury bonds. This fund’s top stocks, like life insurance provider Primerica (PRI) and property and casualty giant Prudential Financial (PRU) will benefit from rising rates even if the rest of their business remains largely unchanged.
Invesco Financial Preferred ETF (PGF)
If you think financial stocks hold potential but you’re primarily interested in the income you can earn via dividends, then consider the PGF that invests in preferred stock from major banks including Barclays PLC (BCS) and Wells Fargo. Preferred stock is a hybrid between traditional stocks and bonds, with less share price volatility and bigger dividends. This fund is largely flat over the last several years, but offers a tremendous yield of 5.4 percent at present — roughly double that of some smaller banks out there. You can be sure that rising rates will push that yield up in kind going forward, too.
First Trust Financials AlphaDEX Fund (FXO)
If all these flavors are hard to pick from, then the more aggressive and tactical FXO fund may be up your alley. This First Trust fund is designed with qualitative metrics in mind. Specifically, the ETF focuses on growth factors including price appreciation, valuation metrics like price-sales ratios and other characteristics including cash flow and return on assets. The result is as close to a hand-picked list as you’ll find, with more than 100 stocks that exhibit above-average characteristics compared to their peers. For the best of what banks have to offer, this may be an interesting way to go.
Direxion Daily Financial Bull 3X Shares (FAS)
Some investors don’t care much about diversification or qualitative assessments. All they care about is making a lot of money as quickly as possible by going all-in on a trend. This leveraged fund uses special financial instruments to aim for three times the movement of the financial sector at large. That means while some of these ETFs are up about 10 percent in the last 12 months, FAS is up 30 percent. This is a risky strategy because the fund will drop three times as fast when financials roll over. But if you really want to bet big, this is the most dramatic way to put your money behind financial stocks.
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9 Financial ETFs Rising with Interest Rates originally appeared on usnews.com
