After the rising rates sparked off the US Bank Crisis, US banks haven’t had the best year. Even Buffett has seemingly weary of them.
Although individual banks may fall, banking and finance as a whole will continue to thrive in the coming decades. With bank stocks being dumped thanks to the fear and uncertainty that lingers after the US bank crisis, you may be thinking of scooping up some undervalued bank stocks.
However, as we have learnt from past financial crises, it is almost impossible to tell which bank could be the next weakest link in the financial system.
Hence, bank ETFs may be a safer way to get some exposure into the banking and finance sector.
Here, I have compiled the Best Bank ETFs that you can consider:
Best Bank ETFs
| Best Bank ETFs | Ticker | Expense Ratio | Why This ETF? | Assets Under Management (AUM) | Performance (YTD) | Dividend Yield | Underlying Index | Inception Date | Fund Manager | Number of Holdings | Top 5 holdings |
|---|---|---|---|---|---|---|---|---|---|---|---|
| Financial Select Sector SPDR Fund | XLF | 0.1% | The oldest financials ETF that gives you exposure to a balanced portfolio containing the largest Financial stocks in U.S., based on S&P 500 | US$30B | -3.41% | 2.11% | Financial Select Sector Index | 16 Dec 1998 | State Street Global Advisors | 72 | Berkshire Hathaway Inc.(13.3%) JPMorgan Chase (9.04%) Visa (7.94%) Mastercard (6.79%) Bank of America(4.47%) |
| Vanguard Financials Index Fund ETF | VFH | 0.1% | Provides wider diversification with a portfolio of large, mid and small cap stocks in the Financials sector. | US$7.65B | -3.31% | 2.5% | MSCI USA IMI Financials 25/50 Index | 26 Jan 2004 | Vanguard | 372 | Berkshire Hathaway Inc.(9.94%) JPMorgan Chase (9.42%) Bank of America (4.91%) Wells Fargo & Co (3.52%) S&P Global (2.81%) |
| Fidelity MSCI Financials Index ETF | FNCL | 0.084% | Cheaper (but newer) alternative to Vanguard’s VFH | US$1.29B | -3.39% | 2.37% | MSCI USA IMI Financials 25/50 Index | 21 Oct 2013 | Fidelity | 392 | Berkshire Hathaway Inc.(9.96%) JPMorgan Chase (9.57%) Bank of America (4.84%) Wells Fargo & Co (3.7%) S&P Global (2.88%) |
| iShares US Financials ETF | IYF | 0.39% | If you are risk averse and only want exposure to the largest U.S. financials and bank companies based on Russell 1000 | US$1.77B | -2.79% | 1.98% | Russell 1000 Financials 40 Act 15/22.5 Daily Capped Index | 22 May 2000 | BlackRock | 142 | Berkshire Hathaway Inc.(13.49%) JPMorgan Chase (9.33%) Bank of America (4.36%) Wells Fargo & Co (4.07%) S&P Global (2.85%) |
1. Financial Select Sector SPDR Fund (XLF)
The Financial Select Sector SPDR fund (XLF) tracks the Financial Select Sector Index that focuses on the Financials Sector as defined by Standard & Poor. You’ll get exposure to the broader financial sector with this ETF.
Key information about the Financial Select Sector SPDR Fund (XLF)
- Inception Date: 16 Dec 1998
- Expense Ratio: 0.1%
- AUM: US$30B
- No. of holdings: 72
- Yield: 2.11%
Why consider the XLF ETF?
XLF is the oldest financials ETF and offers a balanced portfolio that focuses on the Financial sector in the U.S at a relatively low cost of 0.1%.
With the XLF ETF, you get exposure to several sectors within finance, with Banks being the second biggest sector in the portfolio:
| Sector | Weight |
| Financial Services | 33.22% |
| Banks | 24.65% |
| Capital Markets | 21.59% |
| Insurance | 16.38% |
| Consumer Finance | 4.16% |
At the point of writing, these are the top 10 holdings in XLF ETF:
| Company | Ticker | Weight |
| BERKSHIRE HATHAWAY INC CL B | BRK.B | 13.26% |
| JPMORGAN CHASE + CO | JPM | 9.04% |
| VISA INC CLASS A SHARES | V | 7.94% |
| MASTERCARD INC A | MA | 6.79% |
| BANK OF AMERICA CORP | BAC | 4.47% |
| WELLS FARGO + CO | WFC | 3.54% |
| S+P GLOBAL INC | SPGI | 2.76% |
| GOLDMAN SACHS GROUP INC | GS | 2.49% |
| MORGAN STANLEY | MS | 2.47% |
| BLACKROCK INC | BLK | 2.23% |
As of 31 May 2023, this was the historical performance of XLF as reported by SSGA:
If you’re weighing the pros and cons between XLF and VFH, read my in-depth comparison here ???? XLF vs VFH: Which is the better Financials ETF
2. Vanguard Financials Index Fund ETF (VFH)
The Vanguard Financial Index Fund ETF (VFH) tracks the MSCI U.S. Investable Market Financials 25/50 Index which tracks large, mid and small cap U.S. stocks in the financial sectors, as classified under the Global Industry Classification Standard (GICS).
This simply means that VFH ETF gives you exposure to a portfolio of stocks in the financial sectors.
Key information about the Vanguard Financial Index Fund ETF (VFH)
- Inception Date: 26 Jan 2004
- Expense Ratio: 0.1%
- AUM: US$7.65B
- No. of holdings: 372
- Yield: 2.5%
Why consider the VFH ETF?
If you prefer an ETF with a more diversified portfolio within the Financial sector, consider the VFH.
With the VFH ETF, you get exposure to 15 financial sectors including Diversified Banks and Regional Banks which together make up a bulk of the portfolio at 32.3%.
At the point of writing, these are the top 10 holdings in VFH ETF:
| Company | Ticker | Weightage (%) |
| Berkshire Hathaway | BRK.B | 9.94 |
| JPMorgan Chase. | JPM | 9.42 |
| Bank of America | BAC | 4.91 |
| Wells Fargo | WFC | 3.52 |
| S&P Global | SPGI | 2.81 |
| Goldman Sachs Group | GS | 2.70 |
| Morgan Stanley | MS | 2.65 |
| American Express | AXP | 2.38 |
| BlackRock | BLK | 2.34 |
| Citigroup | C | 2.12 |
As of 31 May 2023, this was the historical performance of VFH as reported by Vanguard:
3. Fidelity MSCI Financials Index ETF (FNCL)
The Fidelity MSCI Financials Index ETF (FNCL) also tracks the MSCI U.S. Investable Market Financials 25/50 (like VFH ETF), for a lower fee of 0.084%.
According to its prospectus, the fund will invest at least 80% of its assets in the underlying index. It will also employ a representative sampling strategy to ensure that it has a collective profile that is similar to the underlying index. However, it may not hold all the securities in the MSCI USA IMI Financials 25/50.
Although at the point of writing, the holdings of FBCL is similar to its underlying index as well as the VFH ETF, you may notice differences when the markets are volatile.
Key information about the Fidelity MSCI Financials Index ETF (FNCL)
- Inception Date: 21 Oct 2013
- Expense Ratio: 0.084%
- AUM: US$1.29B
- No. of holdings: 392
- Yield: 2.37%
Why consider the FNCL ETF?
FNCL ETF offers a cheaper (but younger) alternative to the VFH ETF.
The FNCL ETF also offers greater exposure to Banks within its portfolio:
At the point of writing, these are the top 10 holdings in FNCL ETF:
| Name | Ticker | Weightage (%) |
| Berkshire Hathaway | BRK.B | 9.96 |
| JPMorgan Chase | JPM | 9.57 |
| Bank of America | BAC | 4.84 |
| Wells Fargo | WFC | 3.7 |
| S&P Global | SPGI | 2.88 |
| Goldman Sachs Group | GS | 2.66 |
| Morgan Stanley | MS | 2.51 |
| BlackRock | BLK | 2.4 |
| American Express | AXP | 2.38 |
| Citigroup | C | 2.06 |
As of 30 April 2023, this was the historical performance of FNCL as reported by Fidelity:
4. iShares US Financials ETF (IYF)
The iShares US Financials ETF (IYF) tracks the Russell 1000 Financials 40 Act 15/22.5 Daily Capped Index.
The Russell 1000 consists of the largest 1,000 stocks which represents about 93% of the entire U.S. stock market. The Russell 1000 Financials 40 Act 15/22.5 Daily Capped Index is a smaller subset that follows the performance of U.S. large cap companies within the Financials industry.
Key information about the iShares US Financials ETF (IYF)
- Inception Date: 22 May 2000
- Expense Ratio: 0.39%
- AUM: US$1.77B
- No. of holdings: 142
- Yield: 1.98%
Why consider the IYF ETF?
If you are risk averse and only want exposure to the largest U.S. financials and bank companies, consider this.
But remember, according to factor investing, large cap companies are proven to deliver lower returns in the long run although they are less volatile. This is a tradeoff that you’ll need to be comfortable with.
The IYF ETF gives you more exposure to companies in the Financial Services currently:
At the point of writing, these are the top 10 holdings in IYF ETF:
| Name | Ticker | Weightage (%) |
| Berkshire Hathaway | BRK.B | 13.49 |
| JPMorgan Chase | JPM | 9.33 |
| Bank of America | BAC | 4.36 |
| Wells Fargo | WFC | 4.07 |
| S&P Global | SPGI | 3.18 |
| Goldman Sachs Group | GS | 2.85 |
| Morgan Stanley | MS | 2.75 |
| BlackRock | BLK | 2.61 |
| Citigroup | C | 2.41 |
| Marsh & Mclennan | MMC | 2.26 |
As of 31 May 2023, this was the historical performance of IYF as reported by BlackRock:
Why are there no pure Bank ETFs on this list?
You might have noticed that the ETFs listed here are ETFs targeting the broader financial sector.
I did not include community or regional bank ETFs as these ETFs may not be out of the tranches yet given the uncertainty that remains in the market. (you can read more about them in our Best Regional Bank ETFs)
Plus, the approval of the US Debt Ceiling raise could lead to another round of rate hikes which may unravel another Silicon Valley Bank. You don’t want to end up holding such banks when that happens. Although we’ll not know which bank is next, regional and community banks may be more risky in the current markets.
Regional Banking ETFs vs Financial Sector ETFs
Financials ETFs consist of large cap companies in the financial sectors such as Berkshire Hathaway, Visa, S&P Global and more. These companies are generally less volatile and were also not impacted as badly by the banking crisis.
Hence, financials ETFs offer lower risks in the current markets.
In fact, if you had owned KBE (or any regional bank ETFs, prior to the bank crisis, you would still have a large margin to recover from.
That said, if you are bullish on the recovery of banks, or are looking for regional bank ETFs to short, I’ve compiled the best regional bank ETFs in a separate article.
These regional bank ETFs would likely survive another bank crisis, however your portfolio would definitely not be left unharmed.
Hence at the point of writing, it would be more prudent to consider the broader financial ETFs as listed above. I may include regional bank ETFs here once the risk has tapered off in the future.
What is the best ETF for banks now?
Given that uncertainty still lingers in the banking sector, I would consider the XLF ETF for a balanced exposure to the financials sector, or the FNCL ETF if you prefer to have a good diversification in the financials sector with more weightage in banks.
These would position you to ride the recovery of larger banks and the financials sector on the whole, while minimizing the risks of being impacted heavily by any potential bank defaults.
p.s. new to ETF investing? read this guide!
