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
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NYSEMKT: KRE
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NYSEMKT: IYF
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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 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.
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