Best Financial ETFs to Watch Out for

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American banks are some of the longest-standing publicly traded firms in the world, many with histories that date back to well over 100 years. Banks are often regarded as safe investments, especially deep-pocketed companies like JPMorgan Chase and Goldman Sachs.

Bank profits have been steady in the 10 years since the Great Recession but the number of banks in the U.S. has shrunk since 2002. The number of FDIC-insured commercial banks has declined every year since 2002, according to research from Statista.

Large institutions swallow up smaller ones and regulation compliance continues to get more and more expensive. The number of U.S. banks hasn’t been in steady decline for just the last few years. No, this consolidation began over 3 decades ago. When the baby boomers were coming of age, over 18,000 different banking institutions existed in the U.S. In 2017, that number dipped below 6,000 for the first time in a generation. 

The banking industry remains ripe for further consolidation. But if you want to get a slice of these profits, buying individual bank stocks is like a dart-throwing game. Which bank is the next buyout candidate? How much risk can the large banks take on before buckling?

If you don’t have (or want) the answers to these questions, investing in financial ETFs is a good way to gain exposure to the sector without ramping up the risk.

Best Financials ETFs Right Now

What are Financial ETFs?

Exchange-traded funds (ETFs) are securities that act like both a stock and a mutual fund. A financial ETF is a basket of bank stocks grouped together like a mutual fund, but traded on an exchange like the NYSE or NASDAQ. Buying a financial ETF allows investors to get exposure to the entire banking sector, not just a handful of individual banks.

Not every financial ETF contains the same basket of stocks. Some aren’t even managed by humans. Many ETFs track an underlying stock index without the help of a stock-picking manager. Index funds are often cheaper than actively managed ETFs, so you’ll be seeing plenty of examples later in this article.

Financial ETFs come in a number of different flavors, too. Some focus on large national banks; others focus on regional banks or financial services firms. And of course, some just buy the whole darn sector. 

As always, the important features to look for when shopping for ETFs are fees and assets under management. 

History of Financial ETFs 

Like many sector ETFs, the first financial ETF was a spider. No, not the eight-legged variety, but the acronym. Standard and Poor Depository Receipts (SPDR) was the name given by State Street Global Advisors to the first fund to track the S&P 500 index. The fund was launched in 1993 and today trades under the stock ticker SPY. 

State Street launched 10 completely new ETFs in 1998 that concentrated on specific market sectors, such as financials, utilities, energy and technology. Investors used ETFs to invest in sector-specific strategies and the first official financial ETF was born. It still trades today under the ticker XLF.

Today, the ETF market is dominated by the SDPRs, BlackRock’s iShares family, and Vanguard funds, and for good reason. Funds from these firms usually have the lowest fees and plenty of liquidity. 

Thinking about adding financial ETFs to your portfolio? Consider a few of the following things first.

Why You Might Want to Buy It

Here are reasons you may want to add financial ETFs to your portfolio.

• Less risky than buying single bank stocks: Buying individual stocks is always risky, but getting exposure to the banks used to be more difficult. Now that dozens of ETFs cover the sector, investors can get exposure to different kinds of banks and financial firms in one package.
• Higher dividend yield than other sector ETFs: Bank stocks pay better dividends than most sectors, so you’ll be rewarded with solid yields when you buy financial ETFs. 
• Better vehicle than mutual funds: Not only can ETFs be traded on exchanges, but their expenses are lower and the tax burden on investors has decreased thanks to a lack of capital gains.

Considerations Before You Buy

Make sure to consider these points before buying.

• Reinvest dividends with a cost: Expect to incur transactions costs like trading commissions. Mutual fund dividends can automatically be reinvested in the fund without being subject to fees or commissions.
• Higher expense ratios than broad market ETFs: Financial ETF fees have come down considerably in recent years but the cheapest is still twice as expensive as broad market ETFs from Vanguard, Fidelity, iShares or Charles Schwab.
• Many still haven’t recovered from 2008: Most financial ETFs track the largest banks in the U.S. financial system. Because of this, financial ETFs took the brunt of the Great Recession’s bodyslam and many funds have yet to reclaim their pre-recession highs. Just look at some of the charts of the long-standing ETFs below — many haven’t made new all-time highs in a decade.

Putting Financial ETFs into Your Investment Plan

Financial ETFs are great for adding bank exposure to your portfolio while keeping risk to a minimum. But like any investment, you’ll need to plan where these products fit in your portfolio before buying. Many of the best financial ETFs have overlapping holdings and concentrate primarily on the large-cap bank stocks.

Buying an ETF is less risky than purchasing a handful of bank stocks and hoping for good earnings reports (and no scandals). Use the ETFs on this list as a starting point if you want financial sector exposure but don’t want to pick stock. Just keep your personal investment goals in mind before buying anything.

Interested in learning more about ETFs? Check out Benzinga's guide to the best gold ETFs, the best oil ETFs, and the best commodity ETFs.

Frequently Asked Questions