If you’re looking to invest in the financial sector, exchange-traded funds (ETFs) offer a straightforward way to get started. Financial sector ETFs invest in companies involved in various areas of finance, such as banking, insurance, real estate, and investment management. You can opt for a broad financial ETF that covers all these areas or choose to focus more narrowly on a specific sub-sector. Investing through an ETF allows you to hold a diversified portfolio of companies, reducing the risk associated with individual stocks.

What are the main types of financial ETFs?

While the financial sector might seem uniform, it encompasses a variety of businesses. You can either invest in a broad financial ETF that covers all these areas or focus on specific sub-sectors.

  • Broad Financial ETF: This fund includes companies from across the entire financial sector, offering the most diversification.
  • Bank ETF: This fund invests in various banks, often featuring major institutions like J.P. Morgan Chase and Bank of America as significant holdings.
  • Insurance ETF: This fund targets companies providing different types of insurance, including auto, life, and property and casualty.
  • Capital Markets ETF: This fund focuses on companies engaged in capital market activities, such as asset management, brokerage services, and exchanges.
  • Real Estate ETF: This fund invests in real estate investment trusts (REITs) or companies involved in buying or developing real estate, such as hotels or office buildings.

Best financial ETFs

1. Best broad financial ETF

Financial Select Sector SPDR Fund (XLF)
This ETF aims to mirror the performance of the Financial Select Sector Index, representing a broad range of financial activities, including banking, insurance, REITs, and capital markets.

  • 5-year annualized returns: 10.0%
  • Expense ratio: 0.09%
  • Dividend yield: 1.6%

2. Best bank ETF

Invesco KBW Bank ETF (KBWB)
This fund tracks the KBW Nasdaq Bank Index, investing predominantly in major and regional banks, such as Wells Fargo and Bank of America.

  • 5-year annualized returns: 3.1%
  • Expense ratio: 0.35%
  • Dividend yield: 3.2%

3. Best insurance ETF

iShares US Insurance ETF (IAK)
This ETF follows the Dow Jones U.S. Select Insurance Index, covering life, property, casualty, and full-line insurance. Major holdings include Chubb, Progressive, and AIG.

  • 5-year annualized returns: 13.0%
  • Expense ratio: 0.40%
  • Dividend yield: 1.4%

4. Best capital markets ETF

SPDR S&P Capital Markets ETF (KCE)
This fund tracks the S&P Capital Markets Select Industry Index, which includes companies involved in asset management, financial exchanges, investment banking, and brokerages. Key holdings are Robinhood, Virtu Financial, and Raymond James Financial.

  • 5-year annualized returns: 16.3%
  • Expense ratio: 0.35%
  • Dividend yield: 1.9%

5. Best real estate ETF

Vanguard Real Estate ETF (VNQ)
This ETF seeks to replicate the performance of the MSCI U.S. Investable Market Real Estate 25/50 Index. It invests in REITs and companies engaged in acquiring and managing commercial real estate, including hotels and other properties. Major holdings include Prologis, American Tower, and Simon Property Group.

  • 5-year annualized returns: 2.3%
  • Expense ratio: 0.12%
  • Dividend yield: 4.3%

What to look for in an ETF

Before investing in an ETF, it’s important to review some key details about the fund. Here are a few areas to focus on:

  • Sub-sector: Understand which specific sub-sector the ETF focuses on and the characteristics of companies within that industry. Different financial sub-sectors can react differently to economic changes.
  • Investment Track Record: Evaluate the ETF’s performance over various time frames—short, medium, and long-term—to gauge its potential returns. Keep in mind that past performance does not guarantee future results.
  • Expense Ratio: Be aware of the annual fee charged by the fund, as it directly impacts your returns. Generally, larger funds may offer lower expense ratios due to their ability to spread costs over more assets.
  • Fund Holdings: Review the ETF’s top holdings to ensure they align with the fund’s stated objectives and sub-sector focus. It’s important that the actual investments match the fund’s description and goals.

Selecting the right broker for ETFs can also help you find funds with strong long-term performance and favorable characteristics.

In Conclusion

If you want a straightforward way to invest in the financial sector, ETFs offer a convenient solution. You can opt for a broad financial sector ETF for diversified exposure or focus on ETFs that target specific sub-sectors. It’s important to understand how each sub-sector responds to different economic conditions and to be mindful of the ETF’s expense ratio. For beginners, a broadly diversified ETF that tracks major indexes like the S&P 500 may be a more suitable choice.