Special 10-Part Series on the Premier Sector Funds: Financials Waves
Welcome to part seven of my special 10-part series on the premier sector funds. This week, we’ll consider the all-important financial sector.
Made up of companies providing financial services to commercial and retail customers, the financial sector is impacted by changes in interest rates, government regulations, geopolitical uncertainties, unemployment and recessions. So, if the economy was an ocean, these would be the currents directing the ebb and flow, and the winds that create the waves of the financial sector.
The sector was strong in 2024 with mixed expectations going into 2025. Though the economy is expected to grow this year (albeit, at a slower pace than last year) and inflation and interest rates have come down, banks are wary of hot geopolitical situations and regulatory uncertainty.
Bearing all this in mind, let’s take a look at one premier vehicle for riding the waves of the financial sector: The Financial Select Sector SPDR Fund (XLF).
This exchange-traded fund (ETF) tracks the performance of the Financial Select Sector Index, a collection of financial stocks within the S&P 500 Index. XLF is a passively managed fund with a weighted average market cap of $340.03 billion and around $46.80 billion in assets under management. It is the largest ETF attempting to match the underlying index.
Launched in December 1998 and sponsored by State Street Global, this fund offers broad, diversified exposure to the financial sector, offsetting any company-specific risk and is considered a medium risk. Though the fund struggled with rising interest rates in 2023, it recovered to rise an impressive 30% in 2024.
XLF captures a broad swath of the market through its 73 holdings, which generally reflect the securities held in the underlying index. Companies included are those identified as financial companies by the Global Industry Classification Standard. The top industries by weight are Financial Services, 32.09%; Banks, 25.45%; Capital Markets, 22.89% and Insurance, 15.09%.
Top holdings account for around 54% of total assets under management, and include Berkshire Hathaway Inc. (BRK-B),12.20%, JPMorgan Chase & Co. (JPM), 10.15%, Visa, Inc. (V), 8.00%, Mastercard Incorporated (MA), 6.22%, Bank of America Corporation (BAC), 4.53%, Wells Fargo and Co. (WFC), 3.50%, The Goldman Sachs Group, Inc. (GS), 2.64%, American Express Company (AXP), 2.45%, S&P Global Inc. (SPGI), 2.30% and Morgan Stanley (MS), 2.30%.
The fund has net assets of $48.23 billion with a 1.42% yield and one of the lowest expense ratios at 0.09%. It is down 5.43% over the last month, up 7.07% over the last three months and 31.6% over the past 12 months.
Chart courtesy of Stockcharts.com.
As the chart above shows, XLF has been in a consistent upward trend, reflecting economic growth over the last year. With a more or less positive outlook for 2025, this sector is expected to continue to perform well, though financial squalls are, of course, still possible in this ocean.
Looking ahead, mortgage loans are expected to improve with lowered interest rates, but credit card debt could see a drag in growth as consumers encounter higher financial pressures. XLF is a good choice for investors wanting to ride the waves of this sector, as it provides stability with a diversity of solid holdings.
It is never wise, however, to take for granted that the waves will always be favorable; the financial sector has unique risk factors that require consideration. Investors should always do their due diligence before adding any stock, fund or ETF to one’s 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.
