Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you expect the financial services industry to thrive as it emerges from recent years' scandals and reforms and as the global economy eventually heats up, the Financial Select Sector SPDR (NYSE: XLF ) ETF could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in several dozen of them simultaneously.
ETFs often sport lower expense ratios than their mutual fund cousins. The financial ETF's expense ratio -- its annual fee -- is a very low 0.20%.
As you'd expect after the financial crisis, this ETF has not performed well in the recent past, outgunned by the S&P 500 over the past three, five, and 10 years. Still, the future is what matters, and banks are getting stronger again, and may deliver solid performances in coming years. Investors with conviction need to wait for their holdings to deliver.
With a low turnover rate of 16%, this fund isn't frantically and frequently rejiggering its holdings, as many funds do.
What's in it?
Several of this ETF's components made strong contributions to its performance over the past year. American Express (NYSE: AXP ) , for example, gained 27%, and has been striking out in some new directions, such as joining smaller contenders Green Dot (Nasdaq: GDOT) and NetSpend Holdings (Nasdaq: NTSP) in offering prepaid cards. Noting the other companies' strong profits from fees, American Express aims to undercut them on price.
Other companies didn't add as much to the ETF's returns last year, but could have an effect in the years to come. Berkshire Hathaway (NYSE: BRK-B ) is a major financial company with vast insurance holdings such as GEICO. But as the global economy recovers, investors can also expect big things from its other businesses, which include railroads and homebuilding goods. Still, its shares are down 2% over the past year. BB&T (NYSE: BBT ) , which is also off 2%, is healthier than many of its peers and could profit via some smart acquisitions of more sickly or ailing institutions.
AFLAC (NYSE: AFL ) , meanwhile, has long been a strong insurer in Japan. It stands to benefit as the country rebuilds following its catastrophic earthquake and tsunami. AFLAC focuses more on supplemental health insurance, not property insurance, so it should escape the worst of the burden for footing the country's cleanup bill. Yet AFLAC's stock has remained flat over the past year.
The big picture
Demand for banking isn't going away anytime soon. A well-chosen ETF can grant you instant diversification across the industry -- and make investing in and profiting from the sector that much easier.
ETFs can help you find the way to better investing results. To find some great ETF investing ideas, take a look at The Motley Fool's special free report, "3 ETFs Set to Soar During the Recovery."