While technology has been the best place for an ETF investor to put their money for years, rising interest rates mean financial ETFs deserve another look.
The Federal Reserve raised the benchmark rate for the sixth time since the financial crisis, to 1.75%, and other rates are expected to follow. Fed governors indicated the economy remains strong, and more rate hikes are to come.
For real estate developers and buyers who have enjoyed nearly-free money for nearly a decade this was very bad news. The government wants to normalize rates, bringing them back to 3-5%, and reduce the Fed’s balance sheet of borrowings.
As money becomes more expensive, banks become better investments. They buy money at wholesale and sell it at retail, and higher rates mean they can earn fatter margins.
Financial stocks, as a group, are down slightly so far in 2018, but a few financial ETFs have scored gains for investors.
The Best Financial ETFs
The Industry Exposure & Financial Services ETF (NYSEARCA:TETF) has led the way, with a gain of about 8% since the start of 2018. The fund was launched last April, and is designed to track the Toroso ETF Industry Index. So you’re buying the ETF industry itself. TETF currently holds 44 stocks, with its largest holdings being in two index providers, Msci Inc (NYSE:MSCI) and S&P Global Inc (NYSE:SPGI). You also get Blackrock, Inc. (NYSE:BLK), owner of the iShares funds.
The iShares US Broker-Dealers ETF (NYSEARCA:IAI) has scored a gain of 4.5% since the start of the year. It tracks the Dow Jones U.S. Select Investment Services Index and has assets of over $347 million. The fund is run simply, tracking the stocks in its index by market weight, and has an expense ratio of .44%.
The SPDR S&P Regional Banking ETF (NYSEARCA:KRE) follows regional banks and is up 2.4% so far in 2018. Its gross expense ratio is .35%, and it has assets of about $5.3 billion, so it trades heavily and is very liquid, giving you a fair price when you buy or sell. The fund hit a 52-week high early in March but has since fallen back on fears of a trade war.
The PowerShares KBW Property & Casualty Insurance Portfolio (NYSEARCA:KBWP) sports an expense ratio of .35%, and is designed to track the KBW Property & Casualty Index. Since the start of 2018 it is up 1.5%. As the name implies it is heavily invested in insurance stocks, its biggest stakes being in Progressive Corp (NYSE:PGR) , Allstate (NYSE:ALL) and The Travelers Companies Inc (NYSE:TRV)
Finally, if you want international exposure, the Global X China Financials ETF (NYSEARCA:CHIX) is up 2.83% so far in 2018. CHIX has an expense ratio of .65% and tracks the Solactive China Financials Index, a selection of financial companies which all have their primary operations in China.
The Bottom Line
Just saying “buy financial ETFs” won’t solve your investment problems. There are a wide variety of them, for a variety of risk profiles and investment tastes.
My personal preference right now would be for KRE or KBWP. Both cover defined groups that should do well, both have large asset bases, and both have done well for investors this year.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.