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
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.
ETFs 1 - 3
1. Financial Select Sector SPDR ETF
With about $51 billion in assets under management, the Financial Select Sector SPDR ETF (XLF -1.02%) 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 (BRK.A 0.59%)(BRK.B 0.56%), which is technically classified as an insurance company. Other top holdings are JPMorgan Chase (JPM -0.45%), Visa (V 0.25%), Mastercard (MA -0.04%), Bank of America (BAC -2.17%), and Wells Fargo (WFC -1.83%).
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
If you're looking for more of a pure-play bank ETF, the SPDR S&P Bank ETF (KBE -1.52%) could be what you're looking for. It is a relatively small ETF, with $1.5 billion in assets under management, and is a bit more expensive than the overall financial sector ETF discussed earlier. The fund's 0.35% expense ratio is on par with other specialized index funds. (As a general rule, the more specialized an index fund is, the more you can expect to pay in investment fees.)
The SPDR S&P Bank ETF invests in an index that consists of large money center banks, regional banks, diversified financial services providers, and more. It invests in 95 different stocks in all, and while it isn't exactly an equal-weighted fund, it is more diversified than most market-cap-weighted ETFs and is called a "modified equal-weight index." In short, it aims to provide fairly equal exposure to banks of all sizes and types.
None of the ETF's holdings make up more than 1.2% of its total assets. Top holdings include Northern Trust (NTRS -1.06%) and Corebridge Financial (CRBG -3.27%), in addition to major banks such as JPMorgan Chase.
3. SPDR S&P Regional Banking ETF
If you see value opportunities in regional banking but don't want to put your money into any single regional bank, the SPDR S&P Regional Banking ETF (KRE -1.31%) could be a smart way to get diversified exposure.
Like the previous ETF, the SPDR S&P Regional Banking ETF has a moderate 0.35% expense ratio. It aims to track an index of regional bank stocks in the broader S&P indexes and has 147 different stock positions. Since this fund is also a modified equal-weight index, it doesn't have too much exposure to any individual regional bank. To put it another way, if one of the banks held by the fund were to fail, your exposure would be rather limited.
The largest position held by the ETF accounts for about 2.6% of its total assets. On the top holdings list, you'll also find well-known names such as Citizens Financial (CFG -2.08%), East West Bancorp (EWBC -0.93%), and Truist (TFC -1.74%).
ETFs 4 - 5
4. iShares U.S. Financials ETF
The iShares U.S. Financials ETF (IYF -1.08%) tracks a financial sector index that offers a somewhat different makeup than the other financial sector ETFs on the list. Specifically, you'll find more banks and banking-adjacent businesses among its top holdings and fewer financial technology companies (no Visa and Mastercard, for example).
The ETF has a 0.39% 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 -1.81%).
5. Invesco KBW Bank ETF
Finally, for investors who want a pure-play banking ETF with a heavier concentration in the largest U.S. financial institutions, the Invesco KBW Bank ETF (KBWB -1.8%) could be worth a closer look. The fund tracks a bank stock index and owns just 26 total positions. This is a market-weighted fund, so certain big bank stocks make up larger proportions of the fund's assets.
For example, the top holding, Goldman Sachs, makes up 8.7% of the ETF's portfolio. The next largest, Morgan Stanley, accounts for 8.1%. 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 par for the course 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.
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Pros and cons
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
Bank ETF FAQ
What is the best bank ETF to buy?
The best bank ETF depends on your risk tolerance and investment goals. There are some low-cost broad financial sector ETFs, like the SPDR Financials ETF, but there are others that focus solely on banks.
Does Vanguard have a banking ETF?
Vanguard offers the Vanguard Financials ETF (NYSEMKT: VFH), which tracks the financial sector. While this isn't a pure-play bank ETF (it owns insurance stocks and payment processing companies, for example), banks make up the bulk of the ETF's assets.
Does JPMorgan have a banking ETF?
JPMorgan Chase does not offer a bank stock ETF or a financial sector ETF. It offers a few sector-specific ETFs (healthcare and technology, for example), but not financials.
