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6 Financial ETFs to Buy Now

U.S. News & World Report logo U.S. News & World Report 9/27/2017 Jeff Reeves

With the Federal Reserve’s latest policy meeting now behind us, major bank stocks have been firming up. Big names like Citigroup (C) and Bank of America Corp. (BAC) have jumped more than 5 percent percent in September, more than doubling the returns of the Standard & Poor’s 500 index in the same period.

And why shouldn’t the financial sector be rallying? At the Federal Open Market Committee meeting last week, Federal Reserve Chair Janet Yellen reinforced expectations that another interest rate hike was on the way in 2017. Furthermore, she revealed the U.S. central bank would draw down its stockpile of more than $4 trillion in U.S. Treasury and mortgage-related bonds acquired during the financial crisis.

Tighter monetary policies like these impact many areas of the market, but are particularly good for banks. For starters, the prospect of higher rates could boost net interest margins on loans – and thus, profitability for lenders. Secondly, the idea that the Fed can get more aggressive with policies signals that the U.S. economy is generally on firm footing.

But if you believe this trend will last, how should you play the rise in bank stocks right now?

Here are six very different ETFs that all focus on the financial sector in different ways:

Financial Select Sector SPDR Fund (XLF)

YTD return: 9 percent versus 12 percent for the S&P 500 index

Gross expenses: 0.14 percent, or $1.40 annually on $1,000 invested

With more than $26 billion in assets, this financially focused ETF is one of the most popular on Wall Street.

It’s a simple market cap-weighted sector fund, meaning stocks with a bigger market value carry more influence. As of this writing, the "big four" banks JP Morgan Chase & Co. (JPM), Bank of America, Wells Fargo & Co. (WFC) and Citigroup collectively represent about one third the total portfolio. Also, the commercial banking subsector represents almost half the fund’s assets.

Admittedly, that makes the fund a bit over reliant on a few names. But that could be a good thing if you prefer the stability of diversified megabanks instead of smaller players or more aggressive asset managers.

Read more about the XLF here.

SPDR S&P Regional Banking ETF (KRE)

YTD return: -3 percent

Gross expenses: 0.35 percent

Of course, if you’d prefer not to bias your investment toward the four biggest commercial banks in the U.S., you can go small with this regional banking ETF.

Top holdings of this fund are smaller names like Comerica (CMA), Citizens Financial (CFG) and PNC Financial Services Group (PNC), to name a few. Also noteworthy is that while this fund is also weighted by market value, none of these banks are particularly large so none command more than about 3 percent share in the portfolio. That makes this a more diversified fund in many ways than XLF.

Of course, smaller banks are not as well capitalized or influential as the "big four" banks and regional banks as a group have underperformed this year. But if you are bullish on local banking, this fund is for you.

Read more about the KRE here.

SPDR S&P Insurance ETF (KIE)

YTD return: 7 percent

Gross expenses: 0.35 percent

With all the hurricanes lately, insurance stocks have been in focus. From Aug. 1 through early September, stocks like Prudential Financial (PRU) and Metlife (MET) fell by more than 10 percent on fears that expensive claims related to summer storms would take their toll on the bottom line.

However, insurance stocks have bottomed out recently and have begun to move higher again. In fact, since its lows on Sept. 7 the KIE fund has added more than 6 percent in short order since then.

That’s in part because of recent moves from the Fed. After all, insurance companies take the premiums paid by customers and invest them in low-risk interest bearing assets. Higher rates mean higher returns on the cash “float” they have on hand going forward.

Read more about the KIE here.

Guggenheim S&P 500 Equal Weight Financials ETF (RYF)

YTD return: 9 percent

Gross expenses: 0.4 percent

Not sure whether you want to go all-in on big banks or instead rely on the little guys? Like the idea of insurers but only want to dabble in them? Then do it all with this “equal weight” financials ETF.

As the name implies, no single investment has any more power than another here – regardless of size or subsector. The RYF fund regularly rebalances itself, too, to avoid letting a big winner take up too much share in the portfolio.

As such, the ETF is split nicely with about 30 percent each in the subsectors of insurance, capital markets and banks. If you’re looking to play financials but still do so with diversification, there is no better choice out there.

Read more about the RYF here.

iShares MSCI Europe Financials ETF (EUFN)

YTD return: 23 percent

Gross expenses: 0.48 percent

Of course, while a wide variety of U.S. financial stocks hold potential right now, there is promise outside of America in the sector, too. Just take a look at European banks as measured by the EUFN fund, which have roughly doubled the returns of the broader stock market since Jan. 1.

There are a host of reasons for this. First and foremost, the sector at large sold off sharply in mid-2016 on Brexit fears after the United Kingdom vote to leave the European Union and then rebounded almost as dramatically after more moderate forces swept into power across European elections in 2017. There’s also the expectation that British and eurozone growth, like U.S. growth, will be moderately brisk and lift financials as a result.

If you want geographic diversification in your portfolio or if you just want a tactical play on European financials, then EUFN is for you.

Read more about EUFN here.

iShares U.S. Preferred Stock ETF (PFF)

YTD return: 4 percent

Gross expenses: 0.47 percent

If you think financial stocks hold potential but you’re looking for a way to play the sector that involves a little less risk and a little more income potential, then take a look at this preferred stock ETF.

Preferred stock is a kind of hybrid between traditional stocks and bonds; shares are less volatile than stocks but offer more income potential, without being quite as stable and income-oriented as bond investments. The result is an investment that holds firm and offers a decent yield, as evidenced by its current payout of about 5.6 percent based on the last 12 months of distributions.

Why would this be considered a financials investment, though? Well, because while the PFF technically has access to all forms of preferred stock, financial companies are among the most common issuers of this asset class – and thus represent more than $7 out of every $10 this ETF has invested.

Read more about the PFF here.

Copyright 2017 U.S. News & World Report


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