Tap into cyclical economic growth via financial stocks.
While some investors are enamored with digital currencies and blockchain technology, many others are more comfortable relying on the tried-and-true names of the financial sector. These megabanks and investment giants have hundreds of billions of dollars in assets, established dividends and a dominant position at the top of the global economy. And while Bitcoin, Ethereum and the like seem to dominate the headlines, the old guard of the financial sector continues to do well as the U.S. sees an uptick in spending and stabilization after the worst of the COVID-19 pandemic last year. If you’re interested in financial stocks as a play on economic growth, consider one of these top exchange-traded funds as a simple way to gain exposure to the sector.
Financial Select Sector SPDR Fund (ticker: XLF)
The sector leader in assets under management with a whopping $41 billion, XLF is the go-to financial ETF for investors looking to play the biggest names in the U.S. banking and investment management arena. Holding 65 top stocks in the sector, including Warren Buffett‘s Berkshire Hathaway Inc. (BRK.A, BRK.B) and megabank JPMorgan Chase & Co. (JPM), this fund is well exposed to the major Wall Street firms. And with gains of more than 50% in the last 12 months, XLF has significantly outperformed the rest of the stock market lately, showing why this sector and this fund are worth a look.
Vanguard Financials ETF (VFH)
Another big-name financial sector ETF, this Vanguard fund has more than $10 billion in assets. The top holdings are similar to XLF, but where these major financial funds diverge is in the comprehensiveness of their portfolios. VFH has far more total stocks, with nearly 400 holdings making up this fund. The fund is heavily weighted toward megabanks at the top, with 41% of total assets in the top 10 holdings, but smaller insurance firms and regional banks do make an appearance to round out a fairly complete look at the U.S. financial sector in one fund.
SPDR S&P Regional Banking ETF (KRE)
If you want to look beyond big-name stocks like JPM and Berkshire, the roughly $5 billion SPDR S&P Regional Banking ETF is a good alternative. As the name implies, it cuts out the major diversified financial firms to instead limit itself to regional players. Some are still substantial in size, mind you, with $27 billion Fifth Third Bancorp (FITB) and $20 billion KeyCorp (KEY) at the top of the portfolio. However, even though these firms may be bigger than community banks with a handful of branches, they are still characterized by “meat and potatoes” financial operations like mortgages, small business loans and personal banking. That more focused approach is appealing to investors who don’t want exposure to the risks or complications caused by sophisticated investment operations at U.S. megabanks.
iShares Global Financials ETF (IXG)
Looking overseas, the $3 billion IXG fund from iShares allows a different kind of diversification by layering in big multinational financial firms. These include roughly 200 traditional banks, investment funds and insurance companies. You once again get Berkshire and JPM at the top, but at smaller weightings as other huge players like the Royal Bank of Canada (RY), the Commonwealth Bank of Australia (CBA.AX) and Hong Kong’s AIA Group Ltd. (1299.HK) also make the top 10. This globally focused financial ETF has slightly underperformed some U.S.-focused peers, but at better than 40% returns in the last 12 months, it has still beaten the broader S&P 500 — and in theory is more prepared to weather a downturn, thanks to its diversified portfolio.
iShares U.S. Financial Services ETF (IYG)
Taking a different approach than the other funds on this list, IYG is focused only on financial services firms — cutting out ancillary players like insurance companies and other stocks that don’t immediately scream “financial sector.” Think investment banking giants Morgan Stanley (MS) and Goldman Sachs Group Inc. (GS), and credit card giants Visa Inc. (V) and American Express Co. (AXP). You’ll still find picks like Citigroup Inc. (C) and Bank of America Corp. (BAC) in this focused portfolio of just 100 or so stocks, and nearly all will be immediately recognizable as major U.S. financial brands.
Invesco KBW Bank ETF (KBWB)
Taking on the idea of cutting out ancillary players in the sector, this Invesco fund is dedicated only to bank stocks. That is, firms primarily engaged in traditional financial-sector operations. The focused list of just under 30 stocks includes the megabanks of Citi, BofA, JPM and Wells Fargo & Co. (WFC), as well as the larger regional players like Fifth Third and PNC Financial Services Group (PNC). Collectively, they represent a major swath of retail banking in the U.S., so if you truly want an ETF to tap into cyclical financial activity like consumer and business lending, this is the most direct way to do so. And with shares up about 70% in the last 12 months, this modest $2 billion ETF clearly is worth a look despite its smaller footprint.
Ark Fintech Innovation ETF (ARKF)
Investors may already be familiar with Cathie Wood‘s Ark Invest family of ETFs, which have grown rapidly in popularity, thanks to tactical funds that offer focused exposure to disruptive areas of technology and growth. ARKF is the investment manager’s fintech offering, launched in early 2019 and offering exposure to firms in mobile payments, digital wallets and blockchain technology. This is an actively managed fund, and thus the most expensive on the list with annual fees of 0.75%. But it’s popular for a reason, with a portfolio of roughly 40 dynamic fintech companies, both foreign and domestic, that right now includes mobile payments firm Square Inc. (SQ), Canadian e-commerce giant Shopify Inc. (SHOP) and fast-growing Singapore-based fintech firm Sea Ltd. (SE). ARKF is perhaps the most volatile of the offerings on this list, but it also may offer the biggest growth potential as the fintech sector takes off.
Best financial ETFs to buy:
— Financial Select Sector SPDR Fund (XLF)
— Vanguard Financials ETF (VFH)
— SPDR S&P Regional Banking ETF (KRE)
— iShares Global Financials ETF (IXG)
— iShares U.S. Financial Services ETF (IYG)
— Invesco KBW Bank ETF (KBWB)
— Ark Fintech Innovation ETF (ARKF)
More from U.S. News
Update 09/22/21: This story was published at an earlier date and has been updated with new information.