Bank exchange-traded funds (ETFs) are investment vehicles that pool investors' money to allocate to a portfolio of bank stocks. They allow you to invest in bank stocks without having to choose which individual banks to buy.
The banking industry can be an exciting place to invest. However, the industry isn't without its risks. There have been several major banking crises throughout modern history, and banks can be sensitive to economic downturns. This can make investing in individual bank stocks seem scary to the average investor.
Fortunately, there are some excellent exchange-traded funds (ETFs) that can give you exposure to bank stocks in your portfolio. Some ETFs offer broad exposure to the financial sector. Some ETFs focus specifically on banks. Others focus on specific types of banks, such as regional bank stocks.
Five top bank ETFs
There are numerous bank and financial sector ETFs available on the market. Here's a list of five ETFs that offer exposure to bank stocks in different ways and for low investment fees.
1. Financial Select Sector SPDR ETF
With about $52.5 billion in assets under management, the Financial Select Sector SPDR ETF (XLF +0.84%) is the largest ETF focused on the financial sector. It tracks an index of financial sector companies in the S&P 500 and has a total of 76 different stocks in its portfolio.
NYSEMKT: XLF
Key Data Points
Like most index funds, this is a market-cap-weighted fund, which means that larger companies carry more weight in the index. It's important to note that while banking is a large component of the ETF's holdings, the financial sector also includes insurance companies, financial services firms, and a few other types of businesses.
For example, the top holding is Warren Buffett's Berkshire Hathaway (BRK.A +0.43%)(BRK.B +0.40%), which is technically classified as an insurance company. Other top holdings are JPMorgan Chase (JPM +0.96%), Visa (V +0.92%), Mastercard (MA +1.97%), Bank of America (BAC +0.73%), and Wells Fargo (WFC +2.19%).
The Financial Select Sector SPDR fund is also one of the lowest-cost ways to invest in the financial sector, with a 0.08% gross expense ratio. This represents a remarkably low investment cost, translating to just $0.80 in annual investment expenses for every $1,000 invested.
Before we go on, it's worth noting that an expense ratio isn't a fee that you pay directly. Instead, it is simply reflected in the ETF's performance over time, so it's important to know what you're paying.
2. SPDR S&P Bank ETF
If you want more of a pure-play bank ETF, the SPDR S&P Bank ETF (KBE +0.59%) could be what you're looking for. It is a relatively small ETF, with $1.4 billion in assets under management, and is a bit more expensive than the overall financial sector ETF discussed earlier.
NYSEMKT: KBE
Key Data Points
The fund's 0.35% expense ratio is comparable to that of other specialized index funds. (As a general rule, the more specialized an index fund is, the more you can expect to pay in investment fees.)
The SPDR S&P Bank ETF invests in an index that comprises large money center banks, regional banks, diversified financial services providers, and other relevant entities. It invests in 102 different stocks in total.
Although it isn't exactly an equal-weighted fund, it is more diversified than most market-cap-weighted ETFs and is classified as a "modified equal-weight index." In short, it aims to provide fairly equal exposure to banks of all sizes and types.
None of the ETF's holdings make up more than 1.2% of its total assets. Top holdings include regional and smaller banks, as well as major banks such as JPMorgan Chase.
3. SPDR S&P Regional Banking ETF
If you see value opportunities in regional banking but don't want to put your money into any single regional bank, the SPDR S&P Regional Banking ETF (KRE +0.56%) could be a smart way to get diversified exposure. Like the previous ETF, the SPDR S&P Regional Banking ETF has a moderate 0.35% expense ratio.
NYSEMKT: KRE
Key Data Points
This fund aims to track an index of regional bank stocks in the broader S&P indexes and has 146 different stock positions. Since this fund is also a modified equal-weight index, it doesn't have too much exposure to any individual regional bank. To put it another way, if one of the banks held by the fund were to fail, your exposure would be rather limited.
The largest position held by the ETF accounts for about 2.2% of its total assets. On the top holdings list, you'll find well-known names such as Citizens Financial (CFG +1.29%), East West Bancorp (EWBC -1.10%), and Truist (TFC +1.57%).
4. iShares U.S. Financials ETF
The iShares U.S. Financials ETF (IYF +0.84%) tracks a financial sector index that offers a somewhat different makeup from the other financial sector ETFs on the list. Specifically, you'll find more banks and banking-related businesses among its top holdings and fewer financial technology companies (for example, no Visa and Mastercard).
NYSEMKT: IYF
Key Data Points
The ETF has a 0.38% expense ratio, which should certainly be taken into account. Top holdings include Berkshire Hathaway, JPMorgan Chase, Bank of America, Wells Fargo, and Goldman Sachs (GS +1.50%).
5. Invesco KBW Bank ETF
For investors seeking a pure-play banking ETF with a heavier concentration in the largest U.S. financial institutions, the Invesco KBW Bank ETF (KBWB +0.77%) warrants a closer examination. The fund tracks a bank stock index and owns just 26 total positions. This is a market-weighted fund, so certain large bank stocks comprise a larger proportion of the fund's assets.
NASDAQ: KBWB
Key Data Points
For example, the top holding, Goldman Sachs, makes up 8.8% of the ETF's portfolio. The next-largest, Morgan Stanley, accounts for just a little less. Other top holdings include JPMorgan Chase, Bank of America, and Wells Fargo.
The Invesco KBW Bank ETF has a 0.35% expense ratio, which is typical for a subsector-type ETF like this one. If your goal is to simply invest in a portfolio representative of the U.S. commercial banking industry, this could be the best ETF choice for you.
How to invest in bank ETFs
The process of investing in bank ETFs is pretty straightforward:
- Open your brokerage app: Log in to your brokerage account where you handle your investments.
- Search for the ETF: Enter the ticker or company name into the search bar to bring up the stock's trading page.
- Determine the number of shares to purchase: Consider your investment objectives and the percentage of your portfolio you wish to allocate to this ETF.
- Select order type: Choose between a market order to buy at the current price or a limit order to specify the maximum price you're willing to pay.
- Submit your order: Confirm the details and submit your buy order.
- Review your purchase: Check your portfolio to ensure your order was filled as expected and adjust your investment strategy accordingly.
Benefits and risks of investing in bank ETFs
Like any investment, there are pros and cons to investing in bank ETFs. Here are some key considerations to keep in mind when investing.
Benefits of bank ETFs
- Diversification: Any of the bank ETFs on this list will spread your money across many bank stocks. So, if one bank performs particularly poorly, it won't be devastating.
- Lots of choices: You can focus on the big banks, regional banks, a broad spectrum of banks, or the entire financial sector.
- Easy to manage: With ETFs, you don't have to regularly do stock research, rebalance your portfolio, or do any other homework.
- Income: Many bank stocks pay dividends, and bank ETFs pass these through to investors.
Risks of bank ETFs
- Cyclicality: Bank stocks can be economically sensitive. During recessions, loan demand declines, and more people struggle to repay their debts.
- Fees: Some bank ETFs have very low fees, but they should still be considered. After all, if you invest directly in bank stocks, you don't have any management expenses.
How to choose the right bank ETF
As you've seen, there are several excellent bank ETFs, and this wasn't an exhaustive list -- there are more. The best bank ETF for you depends on your investment objectives and goals.
If you simply want financial sector exposure in your portfolio, one of the broad ETFs is generally the best (and lowest-fee) way to go. But if you want to invest for a more specific purpose -- for example, let's say you think falling interest rates will be especially good for regional banks -- a more specialized bank ETF could be a better option, even if it has a somewhat higher fee structure.
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