Financial Sector is Back, 16 Years After Near-Collapse

Financial sector ETFs offer diversified to specialized options to invest in banks and other institutions.

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Reviewed by: etf.com Staff
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Edited by: Ron Day

It was 2008, and the global economy was in arguably its worst condition in history. A financial crisis was trashing the stock market, threatening the existence of banks and other financial institutions. 

Congress was frozen, not knowing quite what to do. It reached the point where then-Treasury Secretary and ex-Goldman Sachs leader Hank Paulson literally dropped to his knees and begged congressional leaders to assist him in bailing out the economy.

Fast forward to now, where after 14 years of near-zero interest rates, the Fed has jacked them back up. The debt in the U.S. and in many prominent parts of the globe, which took a big jump to rescue the world in 2008, is bigger, and the interest payments on it more costly. 

Yet the financial sector contains some of the most dominant businesses on the planet, including banks, credit card firms, brokerages and insurance companies. The financial sector still has plenty of overhanging issues, but it's alive and kicking.

The 800-pound gorilla among financial sector ETFs is the $47 billion Financial Select Sector SPDR ETF (XLF). It owns about 45 stocks, and 55% of the fund is focused on the top 10 holdings. With an average weighted market capitalization of $170 billion, this is clearly a mega cap ETF. And while the banks are near the top of the list, so too is Warren Buffett’s Berkshire Hathaway. Financials are considered value stocks, and so with the S&P 500 selling at 26x trailing earnings, the 16x multiple on XLF is not atypical.

But the financial sector is more than just a few giant businesses. For instance, the SPDR S&P 500 Bank ETF (KBE) has $1.7 billion under management, and as an equal weighted ETF allows investors to diversify widely among the banking industry.

Regional Bank, Insurance ETFs

A year after KBE's 2005 debut, along came the SPDR S&P 500 Regional Bank ETF (KRE). KRE was in the spotlight last spring, as some of its more prominent members faced going concern issues. That episode passed, and regional banks have rallied, but risks there continue. And for those who want to dive deeper into the banking sector, there’s the First Trust NASDAQ ABA Community Bank ETF (QABA).

Other access points for investors include insurance, via the 50-stock, $800 million SPDR S&P Insurance ETF (KIE), and the iShares US Broker-Dealers & Securities Exchanges ETF (IAI). Insurance companies are considered among the more stable businesses in the economy, thanks to their asset strength and time-tested actuarial prowess. And while the brokerage field is not at all new, a more recent development is the emergence of exchanges that have become public companies, which has expanded Wall Street’s opportunity set through options market expansion and of course, Exchange Traded Funds!

Financial stocks still evoke memories of some the biggest financial crises in history. But there’s more to the sector than the headline stocks, and as the financial sector is the largest in the value stock category. So, it will continue to be a central consideration for financial advisors and their clients going forward. 

Rob Isbitts' Wall Street career spans 5 decades and multiple roles, all dedicated to providing clarity to investors by busting classic myths and providing uncommon perspective. He did so as a fiduciary investment advisor, Chief Investment Officer and fund manager for 27 years before selling his practice in 2020. His efforts now focus exclusively on investment research, education and multimedia. He started ETFYourself and SungardenInvestment to provide straightforward commentary and access to his investment intellectual property for portfolio construction, stocks and ETFs. Originally from New Jersey, Rob and his wife Dana have 3 adult children and have lived in Weston, Florida for more than 25 years. 

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