The term "financial services" immediately brings to mind banks. While banking is vital to the functioning of the economy, financial services encompass a wide variety of companies, ranging from insurance companies, FinTech companies, REIT's brokers and asset managers to service providers, such as stock exchanges or credit rating agencies.
Below we delve deeper into the foundations of industry and an ETF for financial services worth investigating:
A Highly Cyclical Sector
Bank and other financial services stocks were among the hardest hit sectors when the COVID-19 pandemic triggered a global sell-off in the stock markets. Although the stock prices of many of these companies have already risen from their March lows, they are still under significant pressure.
Banks were also in the spotlight during the 2008/09 financial crisis, especially in the US, given their exposure to risky financial products. The financial stress turned into a global emergency when the giant US investment bank Lehman Brothers went bankrupt in September 2008, leading governments and central banks to coordinate efforts to save many lenders by recapitalizing them.
In short, the private debt held by many financial companies at the time was transferred to the state and became a national debt. While the burden fell on the taxpayers, the debate about the influence of financial institutions, the role of the state, austerity policies and economic development followed. Most world economies eventually recovered and stock markets boomed.
Yet every economic downturn is different. In contrast to the 2008/09 crisis, recent market declines were not the result of the banking sector or actions by financial companies.
Because it is a highly cyclical sector, the prices of financial services providers are sensitive to changes in the economic climate, including interest rates, economic growth, housing market activity, global health, political and trade issues.
For example, low interest rates can negatively affect banks' margins and profitability. After all, many commercial banks take advantage of the spread between deposit rates and interest rates
Interest rates are historically low in the United States and other countries. On June 25, the Federal Reserve released the results of its annual stress tests and additional sensitivity analysis for banks. The Fed demanded that 33 of the largest US-based banks preserve capital by suspending the repurchase of shares and the distribution of dividends in
. In several other countries, financial institutions have also cut or completely suspended their dividend payments. Now that the passive income element has disappeared, dividend investors can look for alternatives.
There will also likely be short-term price swings in these stocks for the rest of 2020 as headlines – especially regarding the health and economic effects of the pandemic change.
With all of that in mind, here's an ETF that those interested in investing in financial services can consider:
The Financial Select Sector SPDR Fund
Current price: $ 24.03
52-week range: $ 17.49 – $ 31.38
Dividend yield: 2.54%
Expense Ratio: 0.13% per year, or $ 13 on an investment of $ 10,000
The Financial Select Sector SPDR® Fund (NYSE 🙂 has 66 holdings and tracks the index. The top three of the represented sectors are banking, capital markets and insurance.
More than half of the total net worth consists of the top ten companies, amounting to nearly $ 17.2 billion. XLF's three largest companies are Berkshire Hathaway Class B (NYSE 🙂 JPMorgan Chase (NYSE 🙂 and Bank of America (NYSE :).
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Since the late 1950s, legendary investor Warren Buffett and his longtime partner Charlie Munger Berkshire Hathaway (NYSE :), (NYSE: BRK.B) have transformed from a struggling textile manufacturer to a holding company with a market capitalization of more than $ 475 billion.
In fact, the BRK.A share currently has the highest share price of any company in history. In 1964, each Class A share was only $ 20. Now, each share costs over $ 293,000 (no, that's not a misprint, this version of the stock just never split). Therefore, most ETFs would likely hold BRK.B shares, not BRK.A.
Berkshire Hathaway's regular 13F filings with the Securities and Exchange Commission (SEC) show interests in the company. Some of Warren Buffett's favorite companies: large-cap stocks, consumer brands, dividend-paying stocks, and financial institutions, including bancassurers and more recently FinTech companies.
Buying Berkshire Hathaway shares, directly or indirectly through a fund, provides exposure to a wide variety of companies.
So far this year, XLF has decreased by about 21%. However, that statistic only tells part of the story. On March 23, the price hit a 52-week low of $ 17.49, so $ 1,000 invested in the fund would be worth about $ 1,370 at the time.
Bottom Line
There are several financial sector ETFs ranging from US-based large corporations to regional banks to global companies. As always, investors should conduct due diligence and inspect the interests of a particular fund in light of their risk / return profiles.
