Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some financial stocks to your portfolio but don't have the time or expertise to hand-pick a few, the Financial Select Sector SPDR ETF (XLF -0.58%) could save you a lot of trouble. Instead of trying to figure out which financial stocks will perform best, you can use this ETF to invest in lots of them simultaneously.
The Basics
ETFs often sport lower expense ratios than their mutual fund cousins. This ETF, focused on financial stocks, sports a very low expense ratio -- an annual fee -- of 0.18%.
This ETF has performed reasonably, beating the world market over the past one and three years, but lagging it over the past five and 10. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.
Why financial stocks?
If you expect the financial sector to do well over time as it continues to recover from the meltdown of several years ago, you might want to consider financial stocks for your portfolio. Remember, for example, how good banks are at levying fees and generating income, no matter what regulations are thrown at them.
More than a handful of financial stocks had strong performances over the past year. Bank of America (BAC -1.07%) jumped 44%, for example. Its reputation isn't the most squeaky-clean, as it has been slapped with more than $40 billion in fines since the financial crisis -- with billions more possible. That's enough to keep many away, but many are sticking with the company, and my colleague Alexander MacLennan sees plenty of reasons to be bullish on Bank of America: "A low price to book value, substantial potential earnings growth, greater dividends and share buybacks, and a slowly recovering economy." Some worry about the new Volker Rule regulations and whether they'll hamper the performance of big banks. Bank of America CEO Brian Moynihan isn't worried, though, seeing business picking up.
Marsh & McLennan (MMC 0.26%) popped by 40% and yields 2.4%. The insurance broker has been making money from Obamacare, serving as a consultant to corporations. Marsh & McLennan is offering its Mercer Marketplace to companies as a private health-insurance and benefit exchange. The company is also putting a lawsuit from then-New York Attorney General Eliot Spitzer behind it, having paid some $850 million to settle the matter. The company's third quarter featured profit margins growing a bit, while revenue and adjusted earnings per share rose by 3% and 18%, respectively. Analysts at Morningstar like its depth and breadth of services, along with its geographic scope.
Citigroup (C -1.09%) gained 35% and has also lost some public favor in the wake of the financial crisis. One of its most underappreciated features is its massive global diversification -- it's been setting itself up for additional profits in China, for example. Bears haven't liked Citigroup's credit quality, and its stock dilution is a concern, too. Many would like to see a heftier dividend and additional share buybacks. Still, Citigroup still has plenty of fans, including some of our own analysts who have bought shares for themselves.
Aflac (AFL -0.65%) advanced 24% and yields 2.2%. Aflac is an insurance company that derives most of its revenue from Japan, and there's a lot to like about it, such as improving profit margins and solid free cash flow growth. (It has been growing its dividend for more than 30 years, too.) Bulls see it as undervalued, especially relative to peers. Aflac is experiencing solid growth in the U.S., where its supplemental insurance is selling well.
The big picture
If you're interested in adding some financial stocks to your portfolio, consider doing so via an ETF. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.
