Though the stock market has been more volatile in recent months, the U.S. economy continues to run strong. The unemployment rate dipped in February to 3.8 percent, according to the Bureau of Labor and Statistics, and consumer spending readings remain near the highest levels in decades.
While nobody knows what the future holds, economic conditions like this bode very well for financial stocks. Americans with a decent job are more likely to splurge on a credit card purchase or take out loans for cars or homes. If you're looking to invest in this trend and tap into the potential strength of the financial sector, here are nine ways to do that through exchange-traded funds.
Financial Select Sector SPDR Fund
The largest of all financial sector-focused ETFs with nearly $25 billion in assets under management, the XLF fund is an easy way to put more of America's biggest financial names in your portfolio. Top holdings include JPMorgan Chase & Co. (JPM) and Berkshire Hathaway (BRK/B), the investment giant led by Warren Buffett. This is a market cap-weighted portfolio so the very biggest of the big banks make up the lion's share of holdings. Berkshire and JPM are both more than 10 percent of the portfolio and the top 10 holdings represent a little more than half of all assets. Furthermore, the fund only has 68 holdings. Still, many investors like XLF's focused nature.
Vanguard Financials ETF
The second-largest financials fund, this Vanguard ETF has almost $8 billion in assets. It differs from XLF with a much deeper bench of stocks in its portfolio, with more than 400 holdings. Still, it's worth noting that the same bias toward banking in general still exists with about 28 percent of the fund in large diversified banks like Bank of America Corp. (BAC) and another 16 percent in smaller regional banks such as Citizens Financial Group (CFG). The VFH gives more exposure across more stocks – and a rock-bottom expense ratio of just 0.1 percent, or $10 annually on each $10,000 invested.
SPDR S&P Regional Banking ETF
Just because you may be after a focus on bank stocks doesn't mean you want the same old list of large brands. KRE is an interesting alternative because it backs out big players like JPMorgan and Bank of America and instead holds about 120 stocks that are lesser-known. These include larger regional players like Fifth Third Bancorp (FITB), an $18 billion bank that has operations in a large swath of the Midwest and the $800 million Lakeland Bancorp (LBAI) that operates only about 50 branch offices in a small New Jersey footprint. These regional banks offer a different strategy since they aren't caught up in the big investment businesses of megabanks.
iShares U.S. Financial Services ETF
Another way to widen the scope of a financial sector investment is to include technology or service stocks that may not qualify as traditional banking names. In this age of fintech, it's wise to think beyond the same companies in the sector. Chief among them is payment processor Visa (V), a $340 billion stock that gets a small fee every time you swipe one of its branded credit cards. In an increasingly cashless world, Visa is a dominant global force – and making a big push for the future with mobile payments processing solutions. Also, IYG holds MSCI (MSCI), an investments services company that makes many of the ETF benchmark indexes.
Fidelity MSCI Financials Index ETF
This ETF more diversified, with a total holdings list more than 360 positions long, but no single position makes up more than about 9 percent of its portfolio and regional. The flavor is a bit different because FNCL uses a "representative sampling indexing strategy" to run the fund. That means Fidelity has flexibility to pick and choose names to create a representative sample rather than rigidly follow an underlying index – in this case, a benchmark for the financial sector. Fidelity has made a name for itself by being a more hands-on firm – and with fees of just 0.08 percent, that extra layer of insight comes very cheap.
First Trust Financials AlphaDEX Fund
With 185 holdings and about $1 billion in assets under management, this ETF deploys an "enhanced" index methodology to the sector. There is a screening process that ranks the top financial stocks on various qualitative metrics. These include share appreciation, sales growth and return on assets, among others. The result is a list of top holdings that a typical investor may overlook, including insurance company Assured Guaranty (AGO). Insurance companies represent more than 23 percent of the portfolio because their metrics look more attractive. There are no guarantees this strategy will deliver outsized profits, but it is more thoughtful than simply scooping up the largest financial stocks by market cap.
SPDR S&P Insurance ETF
Speaking of insurance, KIE is a focused portfolio of 48 insurance providers including smaller life insurance provider Unum Group (UNM) as well as big names like Progressive Corp. (PGR) and Allstate Corp. (ALL). It is an equal weight sector fund, too, meaning it is rebalanced regularly so no single stock represents too much of the portfolio. Insurance stocks are an attractive subset of financial stocks because they have stable baseline revenue from the premiums they collect. Also, they aren't as exposed to the ups and downs of the broader economy as traditional banks that rely on originating loans or generating investment income.
iShares MSCI Europe Financials ETF
Though New York is in many ways the financial capital of the world, hubs in Frankfurt and London certainly are not to be forgotten – particularly in this age of an interconnected global economy. The EUFN fund is a great way to broaden investment exposure outside the U.S. for geographic diversification and to tap in to the growth potential. Top holdings form a list of global financial giants, including the U.K.'s HSBC Holdings (HSBC) and France's BNP Paribas (BNPQY). With 80 total holdings you may not have in your portfolio already, this $700 million fund allows investors to play the financial sector in a new way.
Invesco KBW Bank ETF
Though not as widely held, KBWB is no slouch with more than $650 million in assets under management. Benchmarked to a slightly different index than the big players, this ETF has a tightly focused list of just 24 total names. You'll find a lot of the familiar big banks near the top of the list, as well as some unique plays like roughly 4 percent of the portfolio in midsized financial Bank of New York Mellon Corp. (BK). Keep in mind this is inherently a less diversified list of holdings and that means you experience more volatility.