NYSEMKT: XLF
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Like most index funds, this is a market-cap-weighted fund, which means that larger companies carry more weight in the index. It's important to note that while banking is a large component of the ETF's holdings, the financial sector also includes insurance companies, financial services firms, and a few other types of businesses.
For example, the top holding is Warren Buffett's Berkshire Hathaway (BRK.A +0.01%)(BRK.B -0.24%), which is technically classified as an insurance company. Other top holdings are JPMorgan Chase (JPM -0.26%), Visa (V +0.78%), Mastercard (MA +0.41%), Bank of America (BAC +0.22%), and Wells Fargo (WFC +0.22%).
The Financial Select Sector SPDR fund is also one of the lowest-cost ways to invest in the financial sector, with a 0.08% gross expense ratio. This represents a remarkably low investment cost, translating to just $0.80 in annual investment expenses for every $1,000 invested.
Before we go on, it's worth noting that an expense ratio isn't a fee that you pay directly. Instead, it is simply reflected in the ETF's performance over time, so it's important to know what you're paying.
2. SPDR S&P Bank ETF
If you want more of a pure-play bank ETF, the SPDR S&P Bank ETF (KBE +0.23%) could be what you're looking for. It is a relatively small ETF, with $1.4 billion in assets under management, and is a bit more expensive than the overall financial sector ETF discussed earlier.
NYSEMKT: KBE
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NYSEMKT: KRE
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NYSEMKT: IYF
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The ETF has a 0.38% expense ratio, which should certainly be taken into account. Top holdings include Berkshire Hathaway, JPMorgan Chase, Bank of America, Wells Fargo, and Goldman Sachs (GS +0.33%).
NASDAQ: KBWB
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For example, the top holding, Goldman Sachs, makes up 8.8% of the ETF's portfolio. The next-largest, Morgan Stanley, accounts for just a little less. Other top holdings include JPMorgan Chase, Bank of America, and Wells Fargo.
The Invesco KBW Bank ETF has a 0.35% expense ratio, which is typical for a subsector-type ETF like this one. If your goal is to simply invest in a portfolio representative of the U.S. commercial banking industry, this could be the best ETF choice for you.
How to invest in bank ETFs
The process of investing in bank ETFs is pretty straightforward:
- Open your brokerage app: Log in to your brokerage account where you handle your investments.
- Search for the ETF: Enter the ticker or company name into the search bar to bring up the stock's trading page.
- Determine the number of shares to purchase: Consider your investment objectives and the percentage of your portfolio you wish to allocate to this ETF.
- Select order type: Choose between a market order to buy at the current price or a limit order to specify the maximum price you're willing to pay.
- Submit your order: Confirm the details and submit your buy order.
- Review your purchase: Check your portfolio to ensure your order was filled as expected and adjust your investment strategy accordingly.
Benefits and risks of investing in bank ETFs
Like any investment, there are pros and cons to investing in bank ETFs. Here are some key considerations to keep in mind when investing.
Benefits of bank ETFs
- Diversification: Any of the bank ETFs on this list will spread your money across many bank stocks. So, if one bank performs particularly poorly, it won't be devastating.
- Lots of choices: You can focus on the big banks, regional banks, a broad spectrum of banks, or the entire financial sector.
- Easy to manage: With ETFs, you don't have to regularly do stock research, rebalance your portfolio, or do any other homework.
- Income: Many bank stocks pay dividends, and bank ETFs pass these through to investors.
Risks of bank ETFs
- Cyclicality: Bank stocks can be economically sensitive. During recessions, loan demand declines, and more people struggle to repay their debts.
- Fees: Some bank ETFs have very low fees, but they should still be considered. After all, if you invest directly in bank stocks, you don't have any management expenses.
How to choose the right bank ETF
As you've seen, there are several excellent bank ETFs, and this wasn't an exhaustive list -- there are more. The best bank ETF for you depends on your investment objectives and goals.
If you simply want financial sector exposure in your portfolio, one of the broad ETFs is generally the best (and lowest-fee) way to go. But if you want to invest for a more specific purpose -- for example, let's say you think falling interest rates will be especially good for regional banks -- a more specialized bank ETF could be a better option, even if it has a somewhat higher fee structure.
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FAQ
Bank ETF FAQ
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