Some say money makes the world go 'round, and that idea supports the business models of banks. From the largest financial institutions on the planet to the small-town one-branch community bank, billions of people rely on a healthy banking industry to safeguard their hard-earned money.
Hundreds of banks trade publicly on U.S. stock exchanges, making it challenging to choose the best possible one. If you want to keep things simple, taking advantage of exchange-traded funds that specialize in bank stocks can be the best way to cash in on this key industry.
Top bank ETFs
Going beyond banks
Some investors referring to "banks" really want full exposure to the entire financial industry. This includes the retail banking institutions that provide checking and savings accounts or offer loans to customers, but also encompasses companies that specialize in offering brokerage services to investors, insurance products, investment banking services to corporate clients, and real-estate focused businesses.
The first two ETFs on the list above offer a way for investors to include every subsector of the financial industry in their investment portfolios through a single investment. The Financial Select SPDR has about 45% of its assets invested in traditional banks, with the rest split between companies focused on capital markets, insurance companies, consumer finance businesses, and companies providing a broader range of diversified financial services. You'll find six top U.S. retail banks among its 10 largest holdings, but you'll also find a couple of investment banks, along with the largest ETF provider and one of the largest insurance conglomerates in the world. Expenses of just 0.13% annually make the fund a solid choice.
The Vanguard ETF uses the same general philosophy. Diversified banks make up about 30% of its assets, with regional banks getting another 15% allocation. Banks that specialize in asset management and custody along with investment banks and brokerage companies combine to make up another 15% of the fund. The remainder of the ETF's assets are split between stocks in the insurance, financial exchange, consumer finance, and real estate industries, along with providers of other financial services. Costs of 0.10% per year are even less expensive than the SPDR.
Banks and nothing but banks
If you want bank stocks and only bank stocks, the remaining three ETFs on the list are where you'll want to concentrate your attention. The SPDR S&P Bank ETF uses a modified equal-weight approach to give complete exposure to its bank-segment index, which includes diversified and regional banks, thrifts, mortgage finance providers, and asset management and custody banks. The equal-weight strategy makes regional banks the commanding component of the ETF's holdings, with more than 75% exposure to the group. Thrifts and mortgage finance companies get another 10% or so, with almost that much going toward diversified banking institutions. Expenses are higher at 0.35%, reflecting the greater level of sector concentration.
Those who want solely regional banks can turn to the SPDR S&P Regional Banking ETF. This fund uses the same general strategy as the SPDR bank ETF above but excludes everything but the pure regional banks. The same 0.35% expense ratio applies. Performance recently hasn't been that much different, but over longer periods of time, regionals have been better performers than larger diversified players in the space, giving the regional banking ETF a slight edge.
Finally, the First Trust ETF seeks to drill down on a smaller number of bank holdings, picking 30 stocks in the industry as part of what it calls the "smart banks" index. Banks are given scores based on their share-price volatility, price-to-cash flow ratios, and average stock-price appreciation over various periods of time. They're then weighted within the fund based on those factors. This fund is the newest of the five, but it hopes to outperform more traditional ETFs in the sector with its novel approach.
Get the bank stocks you want
Bank stocks have been successful over time, and there are a lot of opportunities in the industry right now. With these ETFs, you can make investing in banks easy while tailoring your exposure in line with your particular wishes.
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