US banks and financial institutions are some of the world's strongest companies. They're the backbone of the US economy and, for many investors, are a cornerstone of a properly structured investment portfolio. They're also making rapid advancements in AI and technology that should no doubt help Americans when it comes to both their lives and finances.
However, picking individual stocks is a difficult task. Isolating yourself to a few holdings in the financial sector increases your odds of devastating impacts on your portfolio. A case I can think of right off the top of my head is First Republic Bank, which traded at $219 in late 2021, and at the time of writing, is worth a measly $0.32, down approximately 99.78%.
So, how do we mitigate the risk of picking the wrong "horse" in the race? Exchange-traded funds, of course.
Another good example of this would be the overall volatility of the NASDAQ versus choosing to buy the whole index via a NASDAQ ETF. For more passive investors, the index fund is likely the route they'd go.
Are ETFs a good investment?
Although the vast majority of investors want to pick individual stocks in an attempt to beat the market, the reality is the vast majority will fail. For the most part, unless you're willing to put a lot of time into researching companies and stocks to buy, you'll be better off purchasing a low-expense ratio index fund. This is particularly important in cyclical industries like oil and gas, where bad stock picks can cost you dearly.
Passive ETFs mostly contain many holdings, ultimately lowering the volatility and risk of ruin for an individual investor. For example, someone who bought First Republic Bank at highs has 99%+ losses. In contrast, someone buying a banking ETF with 150 holdings may be in the green.
Obviously, the opposite can be true as well. The individual investor can outperform an exchange-traded fund if they make wise investments and get a little lucky. But for the most part, exchange-traded funds are the way to go if you want to set and forget an investment portfolio.
In this article, I will discuss some of the best US banking ETFs you could add to your portfolio today to give you some exposure to the US financial system.
What are the best ETFs for bank stocks?
- Financial Select Sector SPDR ETF (XLF)
- Invesco KBW Bank ETF (KBWB)
- SPDR S&P Bank ETF (KBE)
- Vanguard Financials ETF (TSE:VFH)
- SPDR S&P Regional Banking ETF (KRE)
Financial Select Sector SPDR ETF (XLF)
The Financial Select Sector SPDR Fund is one of the largest financial ETFs in the United States. The fund isn't solely a banking ETF, but it contains a large enough exposure to US bank stocks that warrants inclusion on the list. 3 of the top 7 holdings are some of the largest banks in the country.
When writing this article, the fund has a total of $35B in assets under management. Its top 5 holdings include the likes of Berkshire Hathaway (BRK.B), JP Morgan Chase (JPM), Visa (V), Mastercard (MA), and Bank of America (BAC).
Three other major US banks are included in the top ten, including Wells Fargo (WFC), Morgan Stanley (MS), and Goldman Sachs (GS). So, with six of the top ten holdings being US banks, you're certainly getting some significant exposure here.
Outside of the banks, it contains some of the best payment processors on the planet, insurance companies like Berkshire, and even one of the largest asset managers in Blackrock (BLK).
The fund is an index fund and aims to track the Financial Select Sector Index. This financial sector index aims to invest in financial services, insurance companies, banks, REITs, etc.
The management expense ratio on the fund is only 0.10%, meaning that if you invest $1000 in the fund, you'll pay $1 in management fees per year. The fund gets you single-click exposure to over 74 of the best financial companies in the United States, so $1 is relatively cheap.
At the time of writing, the ETF yields in the high 1% range. Historically it has hovered in the low 2% range, and I wouldn't expect to get much more than this in terms of yield.
Invesco KBW Bank ETF (KBWB)
The Invesco KBW Bank ETF tracks the KBW Nasdaq Bank Index, which aims to invest in companies engaged in US banking activities.
It is relatively small compared to other funds on this list, with assets under management of $1.9B at the time of writing. And again, because it is a more niche and laser-focused ETF, fees are higher. If you invest $1000, you'll pay $3.50 in management fees yearly.
In terms of holdings, it only contains 25 total, all of which are mid to large-cap banks in the United States. Unlike other ETFs on this list that contain Berkshire Hathaway as the top holding, KBWB has Wells Fargo as its top holding at a low 8% allocation.
JPMorgan, Morgan Stanley, Bank of America, U.S. Bankcorp and Goldman Sachs Group are other notable options inside the top 10 holdings.
The fund has a dividend yield in the mid-3 % range, providing one of the more attractive yields on this list.
There isn't much more to say about this fund, really. Suppose you're looking for a true, pure-play ETF that only focuses on mid to major banking institutions in the United States. In that case, this one is certainly worth a look.
SPDR S&P Bank ETF (KBE)
The SPDR S&P Bank ETF is another pure-play banking ETF. It's a little smaller than KBWB, coming in at $1.5B in assets under management.
Fees are around the same as well. Invest $1000 in this fund, and you'll pay $3.50 yearly in management fees. The major difference between the two funds is the benchmark index they track. KBE tracks the S&P Banks Select Industry Index, which is a wide variety of US banks, including regional players.
This is why a fund like KBE has over 90 holdings while KBWB has only 25. This ETF casts more of a wide net on the US financial sector. Case in point, the top holding inside of the fund at the time of writing is Pinnacle Financial Partners at 1.7% allocation. The first major institution on this list is US Bancorp, which has a 1.5% allocation.
Overall, this fund has underperformed KBWB over the long term, likely due to the lower exposure to the major institutions in the United States, which have thrived over the last decade.
It has a dividend yield in the low 3% range, which is the case for most of the funds on this list that primarily focus on US banks.
Vanguard Financials ETF (TSE:VFH)
When most investors think of a fund manager, they think of Vanguard. It has adopted the reputation of being one of the lowest fee fund managers on the planet, with some of the highest quality funds out there. The Vanguard Financials ETF is no exception.
This fund is quite a bit smaller than SPDR's, with assets under management of $8.7B at the time of writing. Its benchmark index is the MSCI US Investable Market Index Financials 25/50. So, this passive index fund aims to track the returns of its underlying benchmark.
You will see much the same top holdings as with the SPDR ETF. Berkshire, JPMorgan Chase, Visa, Mastercard, and Bank of America round out the top 5. The key difference here is the total weightings. Vanguard's fund is much more diversified and has less reliance on the top holdings in the fund.
While SPDR's top weighting in Berkshire was around 13% of the fund, this ETF's largest holding is Berkshire with an 8% allocation. It contains just under 400 holdings compared to just 74 of SPDR's. This is exactly why you'll see less concentration among the larger holdings in the fund, and it's more spread out to small/mid-cap companies with relatively low allocations.
In terms of fees, invest $1000 in this ETF, and you'll pay $1 a year, which is a 0.10% annual fee.
And finally, the fund yields are in the low 2% range. There have been times when the yield has hit the high 2% range, but this is mostly during crash-like scenarios.
SPDR S&P Regional Banking ETF (KRE)
Unless you've been living under a rock, you probably know that in early 2023 the United States was rocked by a regional banking crisis. However, it does seem like we're past it for the most part, and I decided to include this fund on the list because I've had a lot of investors ask how they can gain exposure to smaller regional banks to take advantage of a rebound in price possibly.
Please make no mistake; this will likely be one of the more volatile funds on this list. Make sure you do extensive research on the regional bank situation in the United States and if investing in these smaller banks suits your risk tolerance. If it doesn't, there are plenty of major bank and financial ETFs that could fit your situation.
The fund has assets under management of $3.5B. Because this is a smaller, more niche ETF that focuses on a particular financial industry sector, it does have higher fees. For every $1000 you invest in KRE, you'll pay $3.50 a year in management fees, working out to be a MER of 0.35%.
In terms of holdings, it contains 140, most of them being smaller American regional banks. At the time of writing, the largest holding inside of the ETF is Western Alliance Bankcorp, a mid-cap company with a market cap of around $5.5B.
The fund's benchmark index is the S&P Regional Banks Select Industry Index, which aims to track smaller banks in the United States. It deploys a sampling strategy, meaning it doesn't mimic the index entirely, but does so in a way where it should be able to replicate or even outperform its benchmark.
Because of the large drawdown in regional bank stock prices, the ETF provides one of the most attractive yields in the low 3% range. If we continue to see a price recovery, this yield will likely go lower.
If you have a larger appetite for risk, this fund may be worth a look.
Overall, these banking and financial ETFs should set you on the right track if you're looking for exposure
Sector ETFs are becoming popular these days, primarily because investors are looking to create a basket of ETFs inside their portfolios to diversify and have a set-and-forget approach.
As such, these banking ETFs are gaining popularity and will no doubt stay relevant for the foreseeable future. There is investment risk when it comes to ETFs, much like any investment. However, if you can cast a wider net and get single-click exposure to a multitude of companies via an ETF, it tends to lower your overall volatility compared to picking individual stocks.