The financial sector could be one of the best-performing areas of the stock market in 2025 and for several years after. While there's no guarantee that any sector, industry, or individual stock will perform well, there are a few big catalysts that could cause the financial sector to deliver better-than-expected profitability, growth, and of course, investor returns.
If you have $1,000 to put to work, the Vanguard Financials ETF (VFH 1.41%) could be a great addition to your portfolio right now. Here's a rundown of what this low-cost ETF is, and why we could be entering an excellent growth environment for banks and other financial services stocks.
The Vanguard Financials ETF in a nutshell
The Vanguard Financials ETF is an index fund that focuses on the financial sector. This includes banks, financial services companies, insurance companies, and a few other categories.
Like most index funds, the Vanguard Financials ETF tracks a weighted index of financial stocks, which means that larger companies make up a larger percentage of the fund's assets. Here's a look at the top 10 holdings of the fund as of the latest information:
|
Company (Symbol) |
% of Fund Assets |
|---|---|
|
JPMorgan Chase (JPM 1.39%) |
8.71% |
|
Berkshire Hathaway (BRK.B 0.27%) |
7.67% |
|
Mastercard (MA 0.46%) |
5.55% |
|
Visa (V 0.68%) |
4.83% |
|
Bank of America (BAC 1.71%) |
3.92% |
|
Wells Fargo (WFC 2.01%) |
3.05% |
|
Goldman Sachs (GS 1.63%) |
2.31% |
|
American Express (AXP 2.05%) |
2.16% |
|
S&P Global (SPGI +0.34%) |
2.04% |
|
Morgan Stanley (MS 1.40%) |
1.95% |
|
Top 10 Holdings |
42.19% |
Data source: Vanguard.
So it's important to realize that although this index fund owns more than 400 different financial sector stocks, it is rather concentrated. Forty-two percent of the fund's assets are invested in just 10 companies.
Like most Vanguard index funds, the Financial ETF has extremely low investment expenses. It has an expense ratio of just 0.1%, which means that $1 of every $1,000 in assets will go toward management costs annually. Note that this isn't a fee you have to pay. It will simply be reflected in the ETF's performance over time.
A rising tide can lift all ships
In a nutshell, the reason I'm writing about the Vanguard Financials ETF instead of any individual bank stock, and I own a few, is that there's an abundance of tailwinds that could affect the entire sector.
- Interest rates may be the most obvious. As interest rates rapidly increased in 2022 and 2023, banks' net interest margins were under pressure. In simple terms, the rates banks paid on deposits increased faster than the yield from their loan portfolios. If the Federal Reserve continues to cut rates, it could have the opposite effect.
- Banks typically have effective tax rates in the 20%-22% range. President Trump campaigned on a 15% corporate tax rate, and the banking industry is likely to be one of the biggest beneficiaries if it is implemented.
- The new administration is clearly in favor of less regulation, and Trump recently said specifically called out bank regulation as an area his Treasury Department will focus on.
- Many financial stocks trade at attractive valuations right now. For example, JPMorgan Chase trades for less than 14 times trailing-12-month earnings, and it's one of the most expensive of its peer group.
In short, the next few years could see financial industry profit expand significantly, and these are already cheap stocks, as a group.
Buy for the long term
There's no guarantee that financial stocks will have a strong year in 2025, and if we get slower-than-expected interest rate cuts or the U.S. enters a recession, the opposite could be true. And even if we see some positive benefits such as corporate tax cuts, they could certainly happen after 2025.
The point is that there's a lot to like about the financial sector right now, but this ETF is designed to be a long-term investment. If you buy it, it should be because you want financial sector exposure at an attractive entry point, not just because you think the ETF will rise this year.
