Bank ETFs are investment vehicles that allow you to invest in bank stocks without having to choose which individual banks to buy. Instead, they spread your money among dozens of different companies.
The banking industry can be an exciting place to invest. However, the industry isn't without its risks. There have been several major banking crises throughout modern history, and banks can be sensitive to economic downturns. This can make investing in individual bank stocks seem scary to the average investor.
Fortunately, there are some excellent exchange-traded funds (ETFs) that can give you exposure to bank stocks in your portfolio. There are ETFs that offer broad exposure to the financial sector. Some ETFs focus specifically on banks. Others focus on specific types of banks, such as regional bank stocks.
Five top bank ETFs
There are plenty of bank and financial sector ETFs in the market. Here's a list of five ETFs that offer exposure to bank stocks in different ways and for low investment fees.
1. Financial Select Sector SPDR ETF
NYSEMKT: XLF
Key Data Points
With about $51 billion in assets under management, the Financial Select Sector SPDR ETF (XLF -0.11%) is the largest ETF focused on the financial sector. It tracks an index of financial sector companies in the S&P 500 and has a total of 73 different stocks in its portfolio.
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 (NYSE:BRK.A)(NYSE:BRK.B), which is technically classified as an insurance company. Other top holdings are JPMorgan Chase (JPM -1.74%), Visa (V +0.84%), Mastercard (MA +1.00%), Bank of America (BAC -1.04%), and Wells Fargo (WFC -1.52%).
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. As you'll see, this is a remarkably low investment cost, translating to just $0.80 in annual investment expenses for every $1,000 you have 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
NYSEMKT: KBE
Key Data Points
NYSEMKT: KRE
Key Data Points
5. Invesco KBW Bank ETF
NASDAQ: KBWB
Key Data Points
Related investing topics
Benefits and risks of investing in bank ETFs
Like any investment, there are pros and cons to investing in bank ETFs. Here are some you should consider 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. In recessions, loan demand declines, and more people have trouble paying back 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.
FAQ
About the Author
