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 mix, the Vanguard Financials ETF (NYSEMKT:VFH) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.
ETFs often sport lower expense ratios than their mutual fund cousins. The Vanguard ETF's expense ratio -- its annual fee -- is a very low 0.23%. (Vanguard is known for low fees.) It yields close to 2%, as well.
As you might expect, this ETF has a mixed performance record, topping the world market over the past year, and roughly matching it over the past three, while significantly underperforming it over the past five. The credit crisis had a big impact on financial companies' performances. 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.
If you expect the financial sector to do well over time as it recovers 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 companies had strong performances over the past year. AFLAC (NYSE:AFL), for example, surged 24%. With respected management, it sports a different business model, selling its insurance largely through employers. It also has focused mainly on supplemental insurance (which tends to feature fatter profit margins), and Japan (where customer loyalty is high, and where it holds substantial market share). On the negative side, it's pressured by weakness in Europe and the U.S., currency exchange issues, and low yields in Japan.
BB&T (NYSE:BBT), up 21%, has been a strong performer relative to many peers in recent years. It chose to bypass many riskier investments, while boosting its commercial loan portfolio and posting solid numbers. It's focusing on some expansion plans in Texas now, aiming to roughly double its presence there over the coming year.
US Bancorp (NYSE:USB), meanwhile, is up 23%, and has earned the admiration of Warren Buffett's partner, Charlie Munger, who said, "Wells Fargo (NYSE:WFC) and US Bancorp avoid stupidity better than most." My colleague Sean Williams has praised the company, noting that it has outperformed most of its peers handily, while focusing on boring, traditional banking activities over higher-risk alternatives, such as derivatives. It has nearly quadrupled its dividend over the past two years, too.
Custodial giant Bank of New York Mellon (NYSE:BK) rose 21% and, along with US Bancorp, it's been deemed one of the safer banks in America. Warren Buffett's Berkshire Hathaway (NYSE:BRK-B) has upped its position in the company, and probably likes that the company has been cutting costs and boosting its assets under management. There are questions, though, about whether the company may have been overcharging some customers.
The big picture
Demand for financial services isn't going away anytime soon. 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.
Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter,owns shares of Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway and Wells Fargo & Company. Motley Fool newsletter services recommend Aflac, Berkshire Hathaway, and Wells Fargo & Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.