Here’s how to invest in bank ETFs.
If you’re looking to invest broadly in economic trends, then the financial sector is the way to go. These “cyclical” stocks tend to be directly tied to things like business lending, mortgage activity and consumer debt. In other words, since so much activity flows through banks, they are your best way to measure if the tide is rising or if it’s going out. If you’re looking for diversified exposure to this market trend, or even if you’re looking to play a more focused sliver of the financial sector, then these eight bank exchange-traded funds are worth a look.
Financial Select Sector SPDR Fund (ticker: XLF)
The largest and most popular financial-focused ETF, the Financial Select Sector SPDR Fund commands an impressive $17 billion under management and regularly tops 50 million shares traded daily. There are nearly 70 total holdings at present in the fund, including megabank JPMorgan Chase & Co. (JPM) and legendary investor Warren Buffett’s investment firm Berkshire Hathaway (BRK.B) as the top holdings. One risk worth noting, however, is that this bank ETF has weighted its holdings by size — so this duo alone represents about 25% of the total portfolio, with the top 10 positions adding up to more than half of its assets. XLF comes with a low annual expense ratio of 0.13%, or $13 for every $10,000 invested.
Vanguard Financials ETF (VFH)
Though not as large as the previous SPDR ETF, the Vanguard Financials ETF is still substantial at more than $6 billion in assets under management and volume that is typically in the ballpark of 700,000 shares traded daily. It’s also a tiny bit cheaper, with a rock-bottom expense ratio of 0.1%. The list of holdings is much deeper, too, at more than 400 total components — including familiar names such as Bank of America Corp. (BAC) and Wells Fargo & Co. (WFC). However, a similar market-cap weighting means it’s also a bit top-heavy, and giants like JPMorgan and Berkshire have outsized influence.
iShares U.S. Financial Services ETF (IYG)
A different kind of fund than the prior leaders is IYG, which includes nontraditional banking and service stocks such as Visa (V) and Mastercard (MA), as well as the usual suspects on Wall Street. The lineup of about 100 companies is more representative of the broader financial sector as a result. That said, like the other funds, IYG is also weighted by size — so while Visa makes it into the top holdings by virtue of being a $440 billion payments powerhouse, other services firms further down the list don’t have much sway when compared with the big banks. The fund’s expense ratio is a bit higher, at 0.42%.
SPDR S&P Bank ETF (KBE)
Finally breaking the trend of bank ETFs that weight holdings based on their size, KBE is an exchange-traded product that regularly rebalances its portfolio to shoot for just more than a 1% allocation in about 90 stocks across the sector. That means stocks such as $3 billion Synovus Financial Corp. (SNV), a Georgia-based community bank with only about 250 branches, has just as much influence over this ETF’s performance as giants like Citigroup (C). KBE also comes with an expense ratio of 0.35%. For investors looking for a truly diversified investment across banking stocks, this may be a better fit.
SPDR S&P Regional Banking ETF (KRE)
Taking the same approach but screening out the big guys is KRE. Another “equal-weight” ETF from SPDR that focuses on financial stocks, this fund’s mandate is to exclude the major international players in the sector and instead features regional outfits. Some are quite large despite a focus only on part of the overall U.S. banking sector, such as the $14 billion Fifth Third Bancorp (FITB) that boasts more than 1,100 retail banking centers across the Midwest and mid-Atlantic regions — but that’s about as large of a bank as you’ll find among its 120-plus holdings. As regional banks are much more connected to the “real economy” via commercial lending and mortgage origination, a fund like KRE has more appeal to certain investors than a broader bank ETF that includes complex megabanks like JPM or BAC. KRE’s expense ratio is 0.35%.
Invesco KBW Bank ETF (KBWB)
In stark contrast to the regional bank ETF is this Invesco offering with just 24 total holdings, all of which are multibillion financial players. That could be good news for a certain kind of investor that, frankly, doesn’t care about the little guys. Unlike bank ETFs that hold many picks but remain reliant on the big players because of how they are weighted, KBWB doesn’t pretend to care about stocks smaller than the aforementioned $14 billion Fifth Third Bancorp. If it’s not in the top tier, then it’s not part of this focused list of holdings — and considering the large national U.S. money centers cover most of the marketplace, there’s something to be said for just seeking exposure to big banks and not bothering with the rest. KBWB has an expense ratio of 0.35%.
iShares MSCI Europe Financials ETF (EUFN)
There has been much talk about how to slice up the U.S. banking sector, but EUFN is a great option for investors who are looking to add some international diversification to their portfolio. This iShares fund with nearly 80 holdings is full of megabanks that even American investors should be familiar with. These include Switzerland’s UBS Group (UBSG), Germany’s Allianz (ALV) and U.K.-based HSBC Holdings (HSBA). For a well-balanced portfolio, it’s important to consider European banks as much as domestic investment opportunities in the financial sector. EUFN also comes with an expense ratio of 0.48%.
iShares Global Financials ETF (IXG)
Of course, you shouldn’t forgo U.S. bank stocks altogether, even if you want an international flavor. And rather than hold one investment in Europe and one in the U.S., IXG makes it easy to invest in the global financial system in a diversified way. With almost 200 holdings, you’ll find domestic favorites like Morgan Stanley (MS) alongside the Royal Bank of Canada (RY) and Japan’s Mitsubishi UFJ Financial Group (MUFG). American companies make up slightly less than half of the fund, but other major developed markets around the globe are well-represented in this truly international and diversified bank ETF. IXG has an expense ratio of 0.46%.
Eight bank ETFs to buy now:
— Financial Select Sector SPDR Fund (XLF)
— Vanguard Financials ETF (VFH)
— iShares U.S. Financial Services ETF (IYG)
— SPDR S&P Bank ETF (KBE)
— SPDR S&P Regional Banking ETF (KRE)
— Invesco KBW Bank ETF (KBWB)
— iShares MSCI Europe Financials ETF (EUFN)
— iShares Global Financials ETF (IXG)
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