7 Best Financial ETFs to Buy Now

Highlights Nov.08,2022 18:20

Keep an eye on these financial ETFs.

The Federal Reserve's hawkish fight against inflation continues, following November's fourth straight 75-basis-point interest rate hike. Rate-sensitive assets like long-duration bonds and technology stocks have suffered immensely, giving up much of their COVID-19-era returns. However, some sectors stand to potentially benefit from rising rates. A great example is the financial sector, which encompasses banks, insurance companies, brokerages, asset managers and lenders. These companies can profit by raising the rates they charge to borrowers. All else being equal, this can improve their revenue and earnings. A great way to access a diversified portfolio of financial sector stocks is via an exchange-traded fund, or ETF. Here are the seven best financial ETFs to buy now.

State Street manages a lineup of 11 "Select Sector" ETFs, which track different stock market sectors represented in the S&P 500. XLF tracks the Financial Select Sector Index, which comprises 66 financial sector stocks from the S&P 500. This includes companies involved in insurance, banking, asset management, capital markets, mortgage real estate investment trusts brokerages, consumer lending and mortgage finance. Notable top holdings include Berkshire Hathaway Inc. (BRK.B, BRK.A), JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC), Wells Fargo & Co. (WFC) and Charles Schwab Corp. (SCHW). Because XLF only holds financial stocks from the S&P 500, it is very top-heavy, with a strong large-cap focus. The ETF charges an expense ratio of 0.1%, which works out to $10 in annual fees for a $10,000 investment.

Some investors might not like the concentrated nature of XLF given that the fund only holds financial stocks represented in the S&P 500. For those seeking greater diversification, VFH might be a better option. This ETF tracks the Spliced U.S. Investable Market Financials 25/50 Index, which holds 373 U.S. financial sector stocks. VFH's top holdings are nearly identical to that of XLF, albeit in lower proportions due to the ETF's higher number of other holdings. The ETF also costs an identical expense ratio of 0.1%. Over a 10-year trailing basis, VLH has returned an annualized 10.84%, which is slightly lower than XLF at 11.24%. Given their similar underlying holdings, expense ratios and historical performance, a good use for VFH might be as a tax-loss harvesting partner for XLF.

Another possible tax-loss harvesting partner for XLF and VFH is IYF. Like the aforementioned ETFs, IYF also provides broad exposure to U.S. financial sector stocks. This ETF tracks the Russell 1000 Financials 40 Act 15/22.5 Daily Capped Index, which holds 139 U.S. banking, insurance and credit card companies. Its top five holdings mirror that of XLF, albeit in slightly lower proportions given its higher number of overall holdings. As expected, IYF's historical performance is similar to that of XLF and VFH with a 10.61% annualized 10-year return. However, the fund is much pricier with a higher expense ratio of 0.39%. This is likely the reason for its lower popularity, as IYF has much lower assets under management of just over $2 billion.

Financial sector investors wishing to diversify out of the U.S. market can buy EUFN. This ETF tracks the MSCI Europe Financials Index, which holds 74 European financial sector stocks. Some of the oldest and most established banks in the world come from countries like the U.K., Switzerland and France. Notable top holdings in EUFN include HSBC Holdings PLC (HSBA.L), Zurich Insurance Group AG (ZURN.SW), UBS Group AG (UBSG.SW), BNP Paribas SA (BNP.PA), Barclays PLC (BARC.L) and the London Stock Exchange Group PLC (LSEG.L). EUFN can be a great way to gain financial sector exposure without being influenced too much by U.S. monetary policy. The ETF costs an expense ratio of 0.48%.

Ark Invest and its fund manager Cathie Wood are known for their suite of thematic ETFs focusing on disruptive trends like next-generation internet, biotech, spaceflight and financial technology, or "fintech," the latter of which is ARKF's specialty. Unlike the previous ETFs on this list, ARKF does not passively track an index. The fund is actively managed, with Ark's team of analysts using fundamental and technical analysis to screen for up-and-coming, growth-oriented fintech stocks. These are mostly small- and mid-cap companies involved in payment processing, blockchain technology, brokerage businesses and funding platforms. The ETF outperformed strongly in 2020 with a 108% return, but fell hard throughout 2021 and the first 10 months of 2022, losing 17.8% and 59.8%, respectively. ARKF costs an expense ratio of 0.75%.

Investors interested in holding only U.S. bank stocks can buy KBWB over broad financial sector ETFs like XLF or VFH. KBWB tracks the KBW Nasdaq Bank Index, a market-weighted index of U.S. bank stocks including investment banks, money centers, regional banks and thrift institutions. Once again, big names like JPMorgan Chase, Bank of America, and Wells Fargo lead the way, but smaller banks like Fifth Third Bancorp (FITB), Capital One Financial Corp. (COF) and Bank of New York Mellon Corp. (BK) also make an appearance in the top 10 holdings. The ETF has underperformed the broad financial sector overall, with a trailing 10-year annualized return of 9.46%. KBWB costs an expense ratio of 0.35%.