Major financial stocks have had a pretty good year in 2017. Big names like Citigroup Inc (NYSE:C) and Bank of America Corp (NYSE:BAC) have jumped roughly 20% since Jan. 1 to outperform the S&P 500’s 16% gain. And only megabank Wells Fargo & Co (NYSE:WFC) has really struggled, and that’s for good reason in the wake of its fake accounts scandal.
What’s more, the best is yet to come for bank stocks and financial exchange-traded funds as we enter 2018.
Federal Reserve Chairwoman Janet Yellen is set to step down, and the era of higher interest rates is upon us. Higher interest rates will help banks with higher net interest margins.
Furthermore, earlier this year the Fed it would draw down its stockpile of over $4 trillion in U.S. Treasury and mortgage-related bonds. These obligations were acquired during the financial crisis, and have been a constant cause of concern for many investors because of the sheer size of the investments.
And of course, the U.S. economy is kicking into high gear and cyclical investments in the financial sector will benefit from increased lending and spending.
This is all very good news for bank stocks in 2018. But if you believe this trend will last, how should you play the rise in the financial sector right now?
Here are seven different ETFs that all focus on the financial sector in different ways to help you follow the money and cash in:
Best ETFs to Buy: Financial Select Sector SPDR Fund (XLF)
Expense Ratio: 0.14%, or $14 per $10,000 invested annually
The Financial Select Sector SPDR Fund (NYSEARCA:XLF) is one of the most popular ETFs to buy now with around $29 billion in assets under management. It’s the go-to fund for investors who just want basic, broad exposure to U.S. banks.
The XLF fund is a simple “market-cap weighted” sector fund, meaning stocks with a bigger market value carry more influence. The big four U.S. commercial banks — JP Morgan Chase (NYSE:JPM), Bank of America Wells Fargo and Citigroup — collectively represent about one third of the XLF ETF portfolio.
Furthermore, smaller regional banks in the commercial banking subsector represent almost half the fund’s assets in total.
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.
Best ETFs to Buy: SPDR S&P Regional Banking ETF (KRE)
Expense Ratio: 0.35%
Of course, if you’d prefer not to bias your investment towards the four biggest commercial banks in the U.S., you can go small with the SPDR KBW Regional Banking (ETF) (NYSEARCA:KRE)
Top holdings of this fund are smaller names like SVB Financial Group (NASDAQ:SIVB) and Comerica Incorporated (NYSE:CMA) 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% share in the portfolio because these are necessarily smaller names than the megabanks like BofA and JPM. That makes this a more diversified fund than a megafund like the previously mentioned XLF ETF.
Of course, smaller banks are not as well capitalized or influential as the Big Four, and regional banks as a group have underperformed this year. But if you are bullish on local banking, this fund is for you.
Best ETFs to Buy: Guggenheim S&P 500 Equal Weight Financials ETF (RYF)
Expense Ratio: 0.4%
Not sure whether you want to go all-in on big banks over the little banks, or vice versa? Looking for a bit more diversification within your ETFs? Then do it all with the Guggenheim S&P 500 Equal Weight Financials ETF (NYSEARCA:RYF).
This “equal weight” financials ETF doesn’t allow a single investment to have more weight than any other in the portfolio. And since the RYF fund regularly rebalances itself, this ETF avoids big winners growing to take up a large share in the investment portfolio.
As such, the ETF is split nicely, with about 30% 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 than this Guggenheim fund.
Best ETFs to Buy – iShares MSCI Europe Financials ETF
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 iShares MSCI Europe Finacials Sector Index Fund (NASDAQ:EUFN), which is up about 20% year to date to outperform the S&P.
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 a 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 euro zone 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.
Best ETFs to Buy – SPDR S&P Insurance ETF (KIE)
Thanks to a rough hurricane season in 2017, insurance stocks have largely underperformed this year. But that’s because of a very small window of pain that has quickly been corrected.
For instance, from August through early September, stocks like Prudential Financial Inc. (NYSE:PRU) and Metlife Inc. (NYSE:MET) fell by more than double digits 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 — and so has the SPDR S&P Insurance ETF (NYSEARCA:KIE). In fact, since its lows on Sept. 7 the KIE fund has added more than 9% in short order since then.
Best ETFs to Buy: iShares U.S. Preferred Stock ETF (PFF)
Expense Ratio: 0.47%
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 the iShares S&P US Preferred Stock Index Fund (NASDAQ:PFF).
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 5.7% 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.
Best ETFs to Buy: Direxion Daily Financial Bull 3X Shares (FAS)
Expense Ratio: 1.05%
If you really want to dive into financials in a big way, then consider the Direxion Daily Financial Bull 3X Shares (NYSEARCA:FAS).
This ETF aims to deliver three times the daily returns of the typical financial sector fund — meaning it goes up three times as much when things are good, and down three times as much when things are bad.
That’s an incredibly risky proposition, yes, but one that has paid off for bold investors in 2017. The fund is up over 49% thanks to a big tailwind for the sector.
If you believe that these trends will persist going forward, then dive into FAS. Just remember that this high-octane play can move just as quickly in the opposite direction if things head south.
As of this writing, Jeff Reeves did not hold a position in any of the aforementioned securities.