Exchange Traded Funds (ETFs)

Featuring a Behemoth Financial Sector Fund

An exchange-traded fund (ETF) in the financial arena that is worth highlighting is the Financial Select Sector SPDR ETF (XLF), which tracks a market-capitalization-weighted index of S&P 500 financial stocks.

As a result, in contrast to two previously featured funds — KBE and KRE — XLF concentrates on the large U.S. banks and steers clear of small-cap financial institutions. With $24.94 billion in total assets and daily trading volume nearing $1.4 billion, XLF is a behemoth that also is massively liquid.

In the past year, XLF alone accounted for more than half of all inflows that flowed into financial ETFs. The fund’s valuation has increased by nearly 45% over the past year. With the expected upcoming interest rate hikes from the Fed, financial experts at Barron’s anticipate that large banks have much to gain.

Another attraction for this fund is that it has a very active trading pit for options. Since December 2016, XLF has been buying a lot of puts to set up a more defensive stance. This helps to limit downward risk, in case unfavorable regulations are passed against the large banks.

XLF charges a low fee for its services, with an expense ratio of just 0.14%. On top of that, it also carries a distribution yield of 2.47% and pays a quarterly distribution. The fund’s one-year return is 34.92%, handily beating out the S&P 500’s one-year return of 17.45%.

XLF holds 63 of the largest financial institutions in its portfolio. Its top five holdings are JPMorgan Chase & Co (JPM), 10.76%; Berkshire Hathaway Inc B (BRK.B), 10.67%; Wells Fargo & Co (WFC), 8.75%; Bank of America Corporation (BAC), 8.26%; and Citigroup Inc. (C), 5.71%.

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If you believe in the strength of the largest U.S banks, I encourage you to research Financial Select Sector SPDR ETF (XLF) as a possible addition to your portfolio.

As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You just may see your question answered in a future ETF Talk.

Jim Woods

Jim Woods is a 20-plus-year veteran of the markets with varied experience as a broker, hedge fund trader, financial writer, author and newsletter editor. Jim is the editor of Successful Investing, the Bullseye Stock Trader, and The Deep Woods (formerly the Weekly ETF Report). His books include co-authoring, “Billion Dollar Green: Profit from the Eco Revolution,” and “The Wealth Shield: How to Invest and Protect Your Money from Another Stock Market Crash, Financial Crisis or Global Economic Collapse.” He’s also ghostwritten many books and articles, as well as edited content for some of the investment industry’s biggest luminaries. His articles have appeared on many leading financial websites, including StockInvestor.com, InvestorPlace.com, Main Street Investor, MarketWatch, Street Authority, Human Events and many others. Jim formerly worked with Investor’s Business Daily founder William J. O’Neil, helping to author training courses in the CANSLIM stock-picking methodology. The independent firm TipRanks rates Jim the No. 3 financial blogger in the world (out of more than 6,000). TipRanks calculates that, since 2012, he's made 361 successful recommendations out of 499 total, earning a success rate of 72% and a +15.3% average return per recommendation. He is known in professional and personal circles as “The Renaissance Man,” because his expertise includes such varied fields as composing and performing music; Western horsemanship, combat marksmanship, martial arts, auto racing and bodybuilding. Jim holds a BA in philosophy from the University of California, Los Angeles, and is a former U.S. Army paratrooper. A self-described “radical for capitalism,” he celebrates the virtue of making money from his Southern California horse ranch.