On Feb. 22, Citrini Research -- an independent financial research firm on Substack -- posted on X and published a report titled, "The 2028 Global Intelligence Crisis."
The report forecasts incredible strides in artificial intelligence (AI) capabilities and efficiency, at the expense of double-digit unemployment, as AI wreaks havoc on white-collar jobs. Under these hypothetical conditions, the report argues that the consumer-dependent economy would be severely impacted, with ripple effects extending to the housing market and other core pockets of American household wealth.
As gloomy as the report's forecast was, even more jarring was the impact on the financial sector, which fell 3.3% on Feb. 23 led by steep losses from major banks and payment processors. In a single session, Visa fell 4.3%, Mastercard slipped 5.3%, and American Express -- which caters to affluent consumers who would presumably be the most impacted from a "global intelligence crisis" -- fell 7%.
Those are big moves from high-margin, stable companies -- especially coming on the heels of reporting by an independent research firm. Here's a simple and straightforward way to buy the sector sell-off through an exchange-traded fund (ETF).
Image source: Getty Images.
The financial sector spotlights the benefits of ETF investing
The Vanguard Financials ETF (VFH 1.64%) features a relatively low expense ratio of just 0.09%, or $9 for every $10,000 invested. Through a single ticker, an investor can get access to 418 stocks. But the bulk of the portfolio is concentrated in the mega-cap industry leaders -- like banks JPMorgan Chase, Bank of America, Wells Fargo, and Citigroup; Berkshire Hathaway; payment processors Mastercard, Visa, and American Express; and investment banks Goldman Sachs and Morgan Stanley.
The financials sector is one of the least top-heavy sectors of the stock market, making the Vanguard Financials ETF especially appealing. For context, the tech sector is dominated by Nvidia, Apple, and Microsoft. Amazon and Tesla are by far the largest consumer discretionary stocks. Alphabet and Meta Platforms tilt the balance of the communications sector. ExxonMobil and Chevron are massive energy stocks. The list goes on.
As large as JPMorgan Chase and Berkshire Hathaway are, there are enough financial companies worth a few hundred billion to make the sector more balanced. There are also several industries that investors may never get exposed to unless they invest in an ETF, like insurance, regional banks, financial exchanges, and so on.
Even the largest regional banks like PNC Financial Services and U.S. Bancorp have market capitalizations below $90 billion, which isn't even large enough to crack the top 20 holdings in the Vanguard Financial ETF. But the combined size of the regional bank industry is 7% of the ETF, which is nearly as large as Berkshire Hathaway's weighting in the fund.
In sum, replicating the financial sector's diversification without an ETF would be tedious and complex.
NYSEMKT: VFH
Key Data Points
A balanced sector to buy now
Another appealing quality of the financial sector is its balance of growth potential, income, and value.
The sector is cyclical and tends to perform well during economic expansions. But it also features a relatively inexpensive valuation compared to the broader market, with the Vanguard Financials ETF sporting a mere 16.4 price-to-earnings (P/E) ratio and 1.6% dividend yield. For context, the Vanguard S&P 500 ETF, which mirrors the index's performance, has a P/E of 27.5 and a 1.1% yield.
Add it all up, and the Vanguard Financials ETF is a simple yet highly effective way to get foundational exposure to the financial sector while also unlocking diversification to help protect against downside risk.
