Bank ETFs are investment vehicles that pool investors' money to allocate to a portfolio of bank stocks. They allow you to invest in bank stocks without having to choose which individual banks to buy.
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 numerous bank and financial sector ETFs available on 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
5. Invesco KBW Bank ETF
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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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