To put it lightly, 2023 has been a trying year for the financial sector. It began with the fall of SVB Financial's Silicon Valley Bank and has since sent a ripple through the sector that's lasted for the better part of the year.
Despite this, the financial sector (based on the financial companies in the S&P 500) is up for the year as of Aug. 12. It's up just over 2%, although that trails surging sectors like information technology and communications services -- up over 41% and 35% year to date, respectively. And there are a handful of sectors that are having a worse year.
Market fluctuations aside, now's not the time to jump ship on the financial sector. If anything, it could be a good time to find some value with the market sentiment generally negative toward the industry. Thankfully, you don't have to pick a winner to lead you; you can spread your investments across the sector.
Image source: Getty Images.
Regional banks can get the short end of the stick
The banking industry is cyclical in nature, often reflecting the cycles of the broader economy. Recently, high interest rates and tighter lending regulations have weighed on the industry. This is especially true for many regional banks, a number of which survived mainly because of government lifelines.
The problems the banking industry faces aren't exclusive to regional banks, but it reinforces the relative stability and security that comes with large banks that are generally considered too big to fail. This mean that in a financial crisis, the assumption is the federal government will step in to prevent these big banks from collapsing.
By no means does this make them risk-free, but it surely helps.
Data source: YCharts
A great route for investors looking to invest in bank stocks is an exchange-traded fund (ETF) that contains the top players in the industry.
Cover a lot of ground at once
The Financial Select Sector SPDR Fund (XLF 1.09%) is an ETF that aims to reflect the financial sector of the S&P 500. Currently, the financial sector is the third-most represented in the S&P 500, trailing only information technology and healthcare.
This ETF contains 72 companies. Here are the top five holdings and their share of the ETF's portfolio:
| Company | Percentage of Fund |
|---|---|
| Berkshire Hathaway | 13.51% |
| JPMorgan Chase | 9.47% |
| Visa | 8.07% |
| Mastercard | 6.85% |
| Bank of America | 4.52% |
Data source: State Street Global Advisors.
Although the top five companies represent over 42% of the fund, they're still diverse with regard to financial industries. Berkshire Hathaway is a holding company that also deals with insurance; JPMorgan Chase is a top investment bank; Bank of America is a top consumer bank; and Visa and Mastercard lead the way in payments processing.
Despite the top-heaviness of the ETF, it covers a lot of ground. It has the top banks in the country, as well as financial institutions that complement the banking industry and keep it running.
NYSEMKT: XLF
Key Data Points
Keep a long-term perspective
Things may not be peachy for banks (and the financial sector in general) in the near term, but that shouldn't discourage long-term investors. The long-term outlook of the banking industry remains strong. You can't be certain how specific companies will perform, but you can be all but certain that the industry as a whole will produce good results over the long haul.
That's why going the Financial Select Sector (or similar ETF) route is ideal. You get the industry's upside while avoiding the inherent risks of investing in single companies. There will be inevitable bumps along the way, but keep in mind that the long term is what matters.
