The financial sector includes companies that offer services related to money management, insurance, savings, and loans among other things. The list of major financial sector companies includes asset management, insurance, commercial and retail banking, brokerages, and credit cards as well. Financial stocks are represented by the Financial Select Sector SPDR ETF (XLF).
Some Of The Major Financial Companies Of The World Include:
J P Morgan Chase & Co
Bank of America Corporation
Wells Fargo & Company
Financials create income through the following ways:
Loans – Issuing loans come with interest rates. These interest rates help financial companies to make money. It depends on the credit score of a person, which determines the interest rate which will be received. The loan is generally fixed for several years and the company gets back its money over the years along with interest.
Investors – These are quite crucial for any company. Any loan company cannot offer loans unless it has capital. The banking sector is also dependent on investment. People need to put their money in the savings account or the checking account, which can be gradually used by the bank to provide loans. Investors receive more percentage interest, when they put their money, in the bank for a longer period, which is utilized by the bank.
Fees – There are different types of fees that are charged by the finance companies. An application fee is quite common which is charged on an individual when the person needs a loan. Such fees are often included in the loan. It can be charged as separate fees as well. Penalty fees are also a way of earning money from financial companies. The fee is levied on a person when a person misses a deadline or is late for a certain payment which has a due date.
Financials are highly correlated with the overall market. High market correlation implies that investors need to use the simple index funds for gaining exposure to the market and not attempting to pick different stocks.
Advantages of Investing in Financial Sector
ETFs were introduced in 1993 and since then they have become quite popular among investors who search for alternatives to mutual funds. Institutions and individuals can benefit from such instruments. These are a basket of different assets that are designed for tracking an index. These offer benefits of low management fees and high intraday price visibility.
Financial ETFs invest in different stocks of companies that are directly involved in the financial services industry. The financial sector includes national and regional banks, insurance providers, brokers, and more.
Stable Income – Financial sector stocks offer great investments for investors who are interested in higher dividends. The dividends of banks steadily increase as the economy increases, which bring in good returns to the investor.
Diversified Income – Purchasing stocks of different financials helps in optimisation asset allocation, providing great diversification.
Low Fees – These are passively managed. They are available with low expense ratios when they are compared to some actively managed funds.
The Major Financial sector ETFs
1. Fidelity® MSCI Financials ETF
The investment provides investment returns that correspond to the performance of MSCI USA IMI Financials Index. At least 80% of the assets are invested in securities which are a part of the underlying index in the fund. This fund is non-diversified.
Yield – 0.12 (Returns -1 year)
Its top 5 holdings are:
JPMorgan Chase & Co JPM – 9.07% net assets
Berkshire Hathaway Inc Class B BRK.B – 8.29 net assets
Bank of America Corp BAC – 5.96% net assets
Citigroup Inc C – 3.21% net assets
Wells Fargo & Co WFC – 2.88% net assets
2. Invesco S&P 500® Equal Weight Financial ETF
This investment tracks the investment results of the S&P 500® Equal Weight Financials Index (the “underlying index”). The fund usually invests a minimum of 90% of its assets in securities. These securities include the underlying index which is composed of different components of the S&P 500® Financials Index. This S&P 500® Financials Index includes stocks of all companies which are in the S&P 500® Index. These are members of the financial sector.
Yield – 0.09 (Returns – 1 Year)
Its top 5 holdings are:
Cincinnati Financial Corp CINF – 1.92% of net assets
Progressive Corp PGR – 1.77 of net assets
MSCI Inc MSCI –1.76 of net assets
T. Rowe Price Group Inc TROW – 1.72 of net assets
Nasdaq Inc NDAQ – 1.71 of net assets
3. Vanguard Financials ETF
This investment tracks the performance of a benchmark index. Such a fund employs the indexing investment approach. This approach tracks the performance of the MSCI US Investable Market Index (IMI)/Financials 25/50. This index consists of stocks that are of small, mid-size, and large size of U.S companies that are within the financial sector. This is a non-diversified fund.
Yield – 0.12 (Returns in 1 year)
Its top 5 holdings are:
JPMorgan Chase & Co JPM – 9.11% of net assets
Berkshire Hathaway Inc Class B BRK.B – 7.80% of net assets
Bank of America Corp BAC – 5.88% of net assets
Citigroup Inc C – 3.39% of net assets
Wells Fargo & Co WFC – 3.14% of net assets
Investing in Financials with Exchange-traded funds comes with many advantages, which makes them highly popular all over the world. They are about lower-cost investment, sector investing benefits, and the ability to make purchases in small amounts. Lower costs are also another top advantage when investing in financials with ETF.
Proper identification of the advantages and disadvantages of ETFs helps investors in navigating the various risks & rewards. They get the chance to decide if these securities are good for their portfolios and whether it is helpful in making profits.