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All Contents © 2018The Kiplinger Washington Editors
By Kyle Woodley
| March 24, 2017
Financial stocks — and bank stocks in particular — have been a popular trade throughout 2017, but almost to a fault. Hopes of a United States devoid of financial regulations and thoughts that interest-rate hikes would send net interest margins skyward sparked buying that even reality couldn’t justify. A broader-market pullback is starting to form, too. As a result, even the top financial stocks and best exchange-traded funds (ETFs) in the space have pulled back over the past few weeks.
And that makes now — or at least soon — a good time to buy.
Because President Donald Trump is pushing ahead with orders and other plans to knock down many profit-hindering regulations across the nation’s banks. And the Federal Reserve did just hike interest rates, and likely will do so at least once more, if not twice, before the year is through.
You could try to capitalize on all this by purchasing individual bank stocks, but I’ll be the first to admit that breaking them down is exceedingly difficult compared to the rest of the publicly traded world. And it pays to have a little diversification on your side when you’re making a bet on a broader theme rather than a specific company.
So today, we’ll look at the five best ETFs to buy if you’d like to invest in bank stocks. This group covers the gamut, from the big boys down to even credit unions.
Prices and data are from the original InvestorPlace story published on March 21, 2017. Click on ticker-symbol links in each slide for current prices and more.
This slide show is from InvestorPlace, not the Kiplinger editorial staff.
Expenses: 0.14%, or $14 annually for every $10,000 invested
The Financial Select Sector SPDR Fund is the biggest financial ETF in the game, and it’s heavily invested in bank stocks, though it’s not the purest play on the space.
In fact, the split as of now is about 45% banks, with another 20% invested in capital markets companies, 18% in insurance, 11% in diversified financial services and 5% in consumer finance.
But there are advantages to being so widely diversified across the sector, including roughly 11% exposure to Berkshire Hathaway Inc. (BRK.B) and Warren Buffett’s brilliant mind.
For those interested in the bank exposure, it’s what you’d imagine from a cap-weighed fund: JPMorgan Chase & Co. (JPM), Wells Fargo & Co. (WFC), Bank of America Corp (BAC) and Citigroup Inc (C) are all in the top five holdings, weighted between about 11% and 5%.
As far as big financial exposure goes, XLF is one of the best ETFs on Wall Street.
Expenses: 0.35%, or $35 annually for every $10,000 invested
If you want a purer play on banks — and specifically bigger banks — you’ll want to be invested in the PowerShares KBW Bank Portfolio instead.
That’s because BofA, JPMorgan, Wells Fargo, U.S. Bancorp and Citigroup are all stacked atop one another in the top five holdings, all ranging around weights of 8%. Meanwhile, the fund also has considerable holdings in “super regionals” like M&T Bank Corporation (MTB) and PNC Financial Services Group Inc (PNC).
The upside to this fund is that you’re exposed to huge, well-capitalized banks that should provide some stability compared to the smaller stocks in this space. That’s particularly useful during market downturns, when investors flee riskier plays.
The downside — and natural flipside — is that there’s very little exposure to the growth of smaller banks, and there’s very little diversification period. That’s because the portfolio consists of a mere 24 stocks.
Expenses: 0.6%, or $60 annually for every $10,000 invested
This one’s a mouthful.
The First Trust Nasdaq ABA Comm Bnk Indx Fnd is one of the best ETFs to buy if you’re looking for the financial sector to shine through some of its smallest members.
The QABA is awfully specific in how it goes about picking among the smaller stocks in the financial space. For one, the fund only invests in Nasdaq-listed bank stocks. From there, it eliminates the 50 largest banks by market capitalization, and also excludes any banks that have specializations in either international finance or credit card businesses.
The highest market capitalization in the whole fund is just $7.8 billion, and the median market cap sits around $930 million. Top holdings include the likes of East West Bancorp, Inc. (EWBC), PacWest Bancorp (PACW) and Arkansas-based Bank of the Ozarks Inc (OZRK).
The portfolio is wide, too, at 160 holdings.
Expenses: 0.47%, or $47 annually for every $10,000 invested
If you want an all-inclusive fund that not only exposes you to the potential in U.S. financials, but also provides a hedge with exposure to financials across the globe, the iShares S&P Global Financials Sect. is a smart place to put your money.
Like XLF, the IXG is not a pure banking stock, though it does provide more direct exposure at 56% of the fund’s weight. 23% is tied up in diversified financials, and roughly 21% is invested in insurance. (The small leftovers are in cash and derivatives.)
The top holdings might sound a little familiar, though. Let me know if you’ve heard of any of these: Berkshire Hathaway. JPMorgan Chase. Wells Fargo.
I thought they’d ring a bell.
The geographic diversification, while substantial, might not be quite what you had in mind. The fund has 46% exposure to the U.S. — by far its largest country weight. Outside America, top geographic holdings are Canada and the United Kingdom at more than 7% apiece, followed by Australia and Japan around the 6% mark. And internationals do find their way into the top holdings, including the U.K.’s HSBC Holdings PLC (HSBC) and Australia’s Commonwealth Bank of Australia.
In 2017, IXG’s global exposure is working out in its favor, with the fund up about 5%, versus roughly 2% for the XLF.
Expenses: 1.05%, or $105 annually for every $10,000 invested
This final ETF is assuredly for the trading-minded investor.
The Direxion Daily Financial Bull 3x Shares is a triple-leveraged ETF that is meant for extremely aggressive trades on perceived moves on financial stocks.
The FAS seeks to return three times the daily performance of the Russell 1000 Financial Services Index, which holds the like of JPMorgan, Berkshire Hathaway and Wells Fargo. That means if the index heads 1% higher, the FAS should head 3% higher (backing out expenses and fees, of course).
That’s dangerous enough by itself, as a 1% move lower on any given day would produce a 3% decline for the FAS, so you can imagine what a really horrendous day for financials broadly would mean. But it’s even worse over time. See, the returns are on a daily basis, which means that a 3% increase in the index over, say, the course of the month might not mean a 9% increase in the FAS during the same time. Depending on how the index got to that 3% increase, FAS theoretically could return more than 9% … or it could return less than 9% … or it could even return a loss.
That has worked out in traders’ favor over the long-term, as FAS is up 383% in the past five years versus just 50% for the XLF. Still, it begs warning, as other leveraged funds aren’t quite so prolific.
Novice investors need not apply.
This article is by Kyle Woodley of InvestorPlace. As of this writing, he held none of the aforementioned securities.
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