10 Best Financials ETFs by 2023 Performance

We cover everything you need to know about financials ETFs, including the top performers.

kent
|
Research Lead
Reviewed by: Lisa Barr
,
Edited by: Lisa Barr

What are financials ETFs, and what are the different types? How do interest rates impact financial sector stocks? We answer all of your questions about the financial sector and highlight the best financials ETFs by performance in 2023. 

What Is a Financials ETF? 

A financials ETF is an exchange-traded fund that primarily invests in the financial sector of the stock market. The financial sector consists of companies involved in various financial services, including banking, insurance, asset management, real estate and other related businesses, collectively referred to as financials. These ETFs may also invest in companies from various regions, providing exposure to global financial markets. 

Financials ETFs are designed to track the performance of a specific financial sector index or a customized index that includes a basket of financial companies' stocks. These ETFs offer investors exposure to a diversified portfolio of financial sector stocks in a single investment. 

Financials ETFs can be attractive to investors seeking exposure to the financial sector without holding individual stocks of specific companies. These ETFs can be suitable for investors who believe in the long-term growth potential of financial services companies or want to diversify their portfolio across various sectors. 

The largest financials ETF, as measured by assets under management as of July 24, 2023, is the Financial Select Sector SPDR Fund (XLF) with an AUM of $35.31 billion.

Types of Financials ETFs 

There are many different types of financials ETFs, which are categorized by industries and services within the financial sector, including banking, insurance, real estate, brokerage, fintech and others. Some financial sector ETFs cover a broad range of companies for diversified exposure.  

Here are some of the different types of financial sector ETFs: 

  • Broad financials ETFs: These ETFs provide exposure to a broad range of companies across the entire financial sector. They include banks, insurance companies, financial conglomerates, asset managers, brokerage firms, and other financial services providers. 
  • Banking ETFs: Banking ETFs focus specifically on companies engaged in traditional banking activities, such as commercial and retail banking, investment banking, and financial services for individuals and businesses. 
  • Insurance ETFs: Insurance ETFs target companies operating in the insurance industry, including life insurance, property and casualty insurance, reinsurance and other insurance-related businesses. 
  • Real estate ETFs (REITs): Real estate investment trust ETFs concentrate on companies involved in real estate ownership, development and management. REITs are required to distribute a significant portion of their earnings as dividends. 
  • Brokerage ETFs: Brokerage ETFs invest in companies that provide brokerage services, online trading platforms, investment advice, and related financial services to individual and institutional clients. 
  • Financial services ETFs: These ETFs include a broader spectrum of financial service providers, such as credit card companies, consumer finance companies, payment processors and other specialized financial services. 
  • Fintech ETFs: Fintech (financial technology) ETFs focus on companies that leverage technology to provide innovative financial services and products, including online banking, digital payments, peer-to-peer lending and blockchain-based financial solutions. 
  • Regional financials ETFs: Some financial sector ETFs may concentrate on specific regions, such as those that focus on companies from a particular country, continent or global region. 
  • Dividend financials ETFs: These ETFs invest in financial sector companies with a history of paying dividends. They may appeal to income-oriented investors seeking dividend income from their investments. 
  • Value or growth financials ETFs: Some financial sector ETFs may follow either a value or growth investment style. Value financials ETFs focus on undervalued companies, while growth financials ETFs target companies with high growth potential. 
  • Leveraged and inverse financials ETFs: These are specialized financial sector ETFs that seek to amplify the returns of the underlying index (leveraged ETFs) or provide inverse returns (inverse ETFs). They are designed for short-term trading and hedging strategies. 

Best Financials ETFs by 2023 Performance 

Here is a list of top-performing financials ETFs, as measured by year-to-date total returns, through July 24, 2023. We excluded certain fund types, such as exchange-traded notes and leveraged ETFs, that are not typically used by retail investors. 

TickerFundExpense RatioAUM YTD Return
GABFGabelli Financial Services Opportunities ETF0.04%$7.03M22.03%
KBWDInvesco KBW High Dividend Yield Financial ETF3.84%$391.79M19.24%
EUFNiShares MSCI Europe Financials ETF0.49%$1.58B18.78
KCESPDR S&P Capital Markets ETF0.35%$151.98M18.60%
BIZDVanEck BDC Business Income ETF10.92%$655.31M17.58%
PFIInvesco DWA Financial Momentum ETF0.60%$29.86M12.30%
IYGIShares US Financial Services ETF0.39%$1.24B8.69%
IXGiShares Financial Global ETF0.40%$432.21M8.23%
DFNLDavis Select Financial ETF0.63%$172.79M6.84%
IYFiShares US Financials ETF0.39%$1.92B6.54%

Advantages and Risks of Investing in Financials ETFs 

Investing in financials ETFs offers several advantages, such as dividends and long-term growth potential, but they also come with potential risks, such as interest rate sensitivity and credit risks. It's essential to understand both aspects before deciding to invest.  

Here are the key advantages and risks of investing in financials ETFs: 

Advantages 

  • Cost-effectiveness: ETFs, in general, have lower expense ratios compared to actively managed mutual funds. This cost-effectiveness can improve overall returns for investors. 
  • Dividends: Many financial companies pay dividends to their shareholders. Investing in financials ETFs can provide investors with potential income through dividend distributions. 
  • Long-term growth potential: Financial sector companies can benefit from economic growth and expansion. As economies grow, the demand for financial services increases, potentially leading to long-term growth in the sector. 
  • Diversification: Financials ETFs provide exposure to a diversified portfolio of companies within the financial sector. This diversification spreads risk across various companies and subsectors, reducing the impact of poor performance from individual stocks. 
  • Easy access: Financials ETFs are traded on stock exchanges like individual stocks, making them easily accessible to investors. Investors can buy and sell shares at prevailing market prices during trading hours. 

Risks 

  • Interest rate sensitivity: Financials ETFs are often influenced by interest rate movements. Rising interest rates can negatively affect some financial companies' profitability, such as banks and other interest-sensitive businesses. 
  • Credit risks: Financial companies are exposed to credit risks, such as defaults on loans and bonds they hold. A deterioration in credit quality can lead to losses. 
  • Market sentiment: Financials ETFs can be sensitive to market sentiment and investor confidence in the overall financial industry. Negative sentiment or concerns about financial stability can lead to volatile market movements. 
  • Systemic risks: The interconnectedness of the financial system can lead to systemic risks, where a problem in one financial institution can impact others and potentially disrupt the entire sector. 
  • Currency risk: If the financials ETF includes international holdings, currency fluctuations can impact the value of investments, especially for investors in different currencies. 
  • Regulatory and legal risks: Financial companies are subject to extensive regulations, and changes in regulations can impact their operations, profitability and compliance costs. 

Rising Interest Rates Benefit the Financial Sector 

Rising interest rates can benefit the financial sector in several ways, including increased interest income and wealth management revenue, but investors should also pay attention to associated negative effects of higher rates, such as increased borrowing costs and reduced mortgage demand. 

  • Net interest margin (NIM) expansion: Banks and financial institutions typically earn revenue by borrowing at lower short-term rates and lending at higher long-term rates. When interest rates rise, the gap between what they pay on deposits and what they earn on loans (net interest margin) widens, leading to increased profitability for these institutions. 
  • Increased interest income: Rising interest rates generally lead to higher interest income for banks and other financial companies from their fixed income assets, such as government and corporate bonds. As existing bonds mature, financial institutions can reinvest the proceeds in higher-yielding assets, boosting their income. 
  • Wealth management revenue: Financial institutions that offer wealth management and investment advisory services may see increased revenue from higher yields on fixed income products they recommend to clients. 
  • Loan pricing and yields: With rising interest rates, banks and other lenders can charge higher interest rates on new loans. This results in higher yields on their loan portfolios, leading to increased income. 
  • Credit card revenue: Credit card issuers may benefit from higher interest rates, as they charge higher interest on outstanding credit card balances, contributing to increased revenue. 

It's important to note that while rising interest rates can benefit the financial sector, the overall impact depends on various factors, including the pace and magnitude of rate increases, the economic environment, and the companies' specific strategies and exposures.  

Additionally, not all financial institutions may benefit equally, as the impact of rising interest rates can vary based on their business models, asset-liability management and the mix of their loan and investment portfolios. 

Furthermore, rising interest rates can also have negative effects on certain segments of the financial sector. For example: 

  • Increased borrowing costs: Financial companies that rely heavily on short-term borrowing may face higher funding costs as interest rates rise. 
  • Reduced mortgage demand: Higher interest rates can lead to reduced demand for new mortgages and refinancing, affecting mortgage lenders and homebuilders. 
  • Interest rate sensitivity: Some financial companies with significant exposure to interest-sensitive assets, such as long-term bonds or mortgage-backed securities, may experience declines in the value of these assets in a rising rate environment. 

Quarterly Earnings Reports Impact Financials ETFs 

Quarterly earnings reports can have a significant impact on financials ETFs. For example, when a company reports strong earnings, it can lead to an increase in the stock price of that company and the financials ETFs that hold it. Conversely, when a company reports weak earnings, it can lead to a decrease in the stock price of that company and associated ETFs. 

Here are some of the factors that investors should consider when analyzing quarterly earnings reports: 

  • Earnings per share (EPS): Earnings per share is a measure of a company's profitability. A higher EPS indicates that a company is more profitable. 
  • Revenue growth: Revenue growth is a measure of how much a company's sales are increasing. A higher revenue growth rate indicates that a company is growing its business. 
  • Earnings guidance: Earnings guidance is a company's prediction of its future earnings. A positive earnings guidance indicates that a company expects to continue to grow its profits. 
  • Earnings surprise: Earnings surprise is the difference between a company's actual earnings and its expected earnings. A positive earnings surprise indicates that a company beat analysts' expectations. 

Has the Regional Banking Crisis Hurt Financials ETFs? 

The regional banking crisis of 2023, specifically arising from the collapse of Silicon Valley Bank (SVB), has had a significant impact on the financial sector as a whole. SVB is a major lender to technology companies, and its collapse has led to concerns about the health of the broader financial industry. SVB is a major clearinghouse for payments between banks, and its collapse led to delays and disruptions in the financial system. 

Here are some of the key impacts of the SVB crisis on the financial sector: 

  • Increased uncertainty: Investors are unsure about the health of the financial system as a whole. This uncertainty has led to volatility in the stock market and a decline in lending activity. 
  • Increased liquidity risk: Liquidity risk is the risk that a financial institution will not be able to meet its financial obligations when they come due.  
  • Increased regulatory scrutiny: Regulators are concerned about the risks posed by the crisis and are taking steps to mitigate those risks. This increased regulatory scrutiny could make it more difficult for financial institutions to do business. 
  • Increased costs: Financial institutions are facing higher costs for credit insurance, deposit insurance and other forms of insurance. These higher costs could lead to higher fees for consumers. 

Bottom Line on Financials ETFs 

Financials ETFs offer investors exposure to the financial sector as a whole or to specific areas of the sector, such as banking, insurance and real estate. However, it's essential to consider the risks associated with investing in the financial sector. Economic downturns, regulatory changes, interest rate fluctuations and credit market conditions can all influence the financial industry's performance.  

As with any investment, investors should carefully assess their risk tolerance, investment goals and time horizon before investing in financials ETFs.  

Kent Thune is Research Lead for etf.com, focusing on educational content, thought leadership, content management and search engine optimization. Before joining etf.com, he wrote for numerous investment websites, including Seeking Alpha and Kiplinger. 

Kent holds a Master of Business Administration (MBA) degree and is a practicing Certified Financial Planner (CFP®) with 25 years of experience managing investments, guiding clients through some of the worst economic and market environments in U.S. history. He has also served as an adjunct professor, teaching classes for The College of Charleston and Trident Technical College on the topics of retirement planning, business finance, and entrepreneurship. 

Kent founded a registered investment advisory firm in 2006 and is based in Hilton Head Island, SC, where he lives with his wife and two sons. Outside of work, Kent enjoys spending time with his family, playing guitar, and working on his philosophy book, which he plans to publish in the coming year.