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The best bank ETFs can provide instant exposure to the entire financial sector. Let’s find out which one is optimal for your investing strategy.
Best Bank ETFs: Background
The banking exchange-traded funds (ETFs) in this article are either designed to track the entire financial sector or a specific subsector of the entire financial sector.
For example, some track all the banking stocks in the S&P 500, and another might just invest in regional bank stocks. The right one for you ultimately depends on the type of exposure you’re seeking.
Here’s a quick overview of the top six bank ETFs:
- SPDR S&P Bank ETF (KBE)
- Financial Select Sector SPDR Fund (XLF)
- Invesco KBW Bank ETF (KBWB)
- First Trust Nasdaq Bank ETF (FTXO)
- iShares US Regional Banks ETF (IAT)
- Vanguard Financials ETF (VFH)
Now, we will examine each of these exchange-traded funds in more detail.
Best Bank ETFs
#1. SPDR S&P Bank ETF (KBE)
The SPDR S&P Bank ETF follows a modified equal-weighted index consisting of companies in the following sub-industries: asset management and custody banking, diversified banks, regional banks, thrifts and mortgage finance, and other diversified financial services.
- Performance over 1-Year: +1.00%
- Annual Dividend Yield: 1.94%
- Expense Ratio: 0.35%
- AUM: $2.2 billion
- Number of Holdings: 103
KBE primarily focuses on the “Regional Banks” subsector of the financial industry, allocating around 75% of the fund to them.
Considering the fund’s equal-weighted structure, KBE doesn’t prefer one geographic area to the next or discriminate by market cap.
This ETF provides exposure to smaller banks that are downstream from the larger, perhaps more well-known national banks.
KBE offers a 1.94% dividend yield, too. This expresses the weighted average of the underlying stocks’ indicated annual dividend divided by price.
KBE Top Holdings:
- Silvergate Capital (SI) 1.42%
- Rocket Companies (RKT) 1.42%
- PennyMac Financial Services (PFSI) 1.35%
- First Citizens Bancshares (FCNCA) 1.28%
- Texas Capital Bancshares (TCBI) 1.28%
#2. Financial Select Sector SPDR Fund (XLF)
The Financial Select Sector SPDR Fund represents the financial sector of the S&P 500 Index.
- Performance over 1-Year: -7.00%
- Annual Dividend Yield: 1.51%
- Expense Ratio: 0.10%
- AUM: $30 billion
- Number of Holdings: 68
XLF launched in 1998 and invests in the companies that are commonly associated with the financial and banking sector.
This ETF allocates 38% to “Banks” like JP Morgan and Bank of America, 27% to “Capital Markets” like BlackRock, 16% to “Insurance”, and the rest to other financial and consumer services.
People turn to XLF to “see how the banks are doing”; it broadly represents the traditional banking sector.
It amassed over $30 billion in AUM thanks to its first-mover advantage, low expense ratio, and high concentration in popular stocks like Berkshire Hathaway.
XLF Top Holdings:
- Berkshire Hathaway (BRK.B) 14.47%
- JPMorgan (JPM) 9.05%
- Bank of America (BAC) 6.47%
- Wells Fargo & Company (WFC) 4.51%
- S&P Global (SPGI) 3.46%
#3. Invesco KBW Bank ETF (KBWB)
The Invesco KBW Bank ETF comprises large national US money centers, regional banks, and thrift institutions in the United States.
- Performance over 1-Year: -10.00%
- Annual Dividend Yield: 1.79%
- Expense Ratio: 0.35%
- AUM: $1.9 billion
- Number of Holdings: 26
KBWB provides balanced exposure to regional and large-cap banks, with 44% and 40% allocations to each, respectively.
There are only 26 holdings in KBWB. This higher concentration reduces its diversification, resulting in steeper price movements to the upside and downside compared to the broader banking sector.
KBWB is ideal if you’re looking for regional and national bank exposure within a single fund and prefer a concentrated fund structure.
KBWB Top Holdings:
- Citigroup (C) 8.32%
- Wells Fargo & Company (WFC) 8.25%
- Bank of America (BAC) 7.79%
- US Bancorp (USB) 7.73%
- JP Morgan Chase (JPM) 7.40%
#4. First Trust Nasdaq Bank ETF (FTXO)
The First Trust Nasdaq Bank ETF selects the 30 most liquid eligible bank securities from the NASDAQ US Benchmark Index and then ranks those securities based on their volatility, value (cash flow to price), and growth to create the “Nasdaq US Smart Banks Index”.
- Performance over 1-Year: -6.00%
- Annual Dividend Yield: 1.52%
- Expense Ratio: 0.60%
- AUM: $240 million
- Number of Holdings: 31
FTXO has been the better performing bank ETF over the previous year.
The fund’s methodology comes at a cost; First Trust charges a 0.60% expense ratio, which is significantly more expensive than the other financial ETFs on this list.
FTXO’s top holdings will fluctuate more than the average bank ETF, but it currently has a healthy mix of regional and large-cap banks.
FTXO Top Holdings:
- M&T Bank Corporation (MTB) 8.27%
- Wells Fargo & Company (WFC) 8.08%
- Popular (BPOP) 7.95%
- Regions Financial Corporation (RF) 7.66%
- JPMorgan Chase & Co. (JPM) 7.24%
#5. iShares US Regional Banks ETF (IAT)
The iShares US Regional Banks ETF provides exposure to small and mid-size US regional banks.
- Performance over 1-Year: -4.00%
- Annual Dividend Yield: 1.75%
- Expense Ratio: 0.41%
- AUM: $872 million
- Number of Holdings: 40
The top ten holdings in IAT make up over 64% of the fund, so you better like them.
This ETF is pretty similar to the previously mentioned SPDR S&P Bank ETF (KBE) given its narrow focus on regional banks.
In accordance with its name, the iShares US Regional Banks ETF invests 85% of the fund in regional banks across the country.
Investing in regional banks, compared to investing in the national banks, is fundamentally a different investment; they are at different locations on the risk curve.
Generally speaking, you can expect more volatility in the regional bank holdings.
IAT Top Holdings:
- PNC Financial Services (PNC) 12.18%
- Truist Financial (TFC) 11.91%
- US Bancorp (USB) 11.44%
- M&T Bank Corporation (MTB) 5.62%
- First Republic Bank (FRC) 4.90%
#6. Vanguard Financials ETF (VFH)
The Vanguard Financials ETF invests in multi-cap companies across the following sub-industries: banking, mortgage finance, consumer finance, specialized finance, investment banking, and brokerage, asset management and custody, corporate lending, insurance, and financial investment.
- Performance over 1-Year: -7.00%
- Annual Dividend Yield: 1.78%
- Expense Ratio: 0.10%
- AUM: $8.9 billion
- Number of Holdings: 373
VFH is similar to the previously mentioned Financial Select Sector SPDR Fund (XLF) given its bias towards the flagship national banks and low expense ratio.
However, the Vanguard Financials ETF has far more holdings than XLF, consisting of 373 stocks compared to 68.
But don’t confuse VFH’s larger constituent base with equal-weighting; the top ten holdings in VFH make up +40% of the fund.
In our estimation, the Vanguard Financials ETF serves as a one-stop-shop for the banking and financial sector.
VFH checks every box regarding exposure to the various subsectors of the banking industry.
VFH Top Holdings:
- Berkshire Hathaway (BRK.B) 8.31%
- JPMorgan Chase (JPM) 7.84%
- Bank of America (BAC) 5.33%
- Wells Fargo (WFC) 3.52%
- S&P Global (SPGI) 2.81%
Alternatives to the Best Bank ETFs
You could buy individual bank stocks instead of bank ETFs. This is a riskier alternative, but you might generate some alpha if you pick the individual winners that carry the funds.
Alternatively, you could invest in next-gen fintech stocks like Block (SQ) and PayPal (PYPL) that are trying to provide new banking services or augment existing services. There are also plenty of fintech ETFs to consider, such as the Global X FinTech ETF (FINX).
Finally, you can simplify your investing strategy and just buy the index: the S&P 500 ETF (VOO). Passive investing tends to outperform active investing anyways.
Best Bank ETFs: Frequently Asked Questions
What is the best ETF for banks?
The best ETF for banks is either the Vanguard Financials ETF (VFH) or the Financial Select Sector SPDR Fund (XLF). They have the best combination of cost and bulge-bracket bank exposure.
Should I invest in bank ETFs?
You should invest in bank ETFs if you’re seeking exposure to the financial sector of the economy. You can gain access to hundreds of bank stocks within a single, cost-effective fund.
Is there an ETF for US banks?
There are several ETFs for US banks, including the SPDR S&P Bank ETF (KBE), Invesco KBW Bank ETF (KBWB), and First Trust Nasdaq Bank ETF (FTXO). However, the iShares US Regional Banks ETF (IAT) provides the best access to US regional banks.
How do I invest in a bank ETF?
You can invest in a bank ETF by searching for a ticker symbol, such as VFH, XLF, IAT, or FTXO, and then deciding on how many shares to buy. Bank ETFs will differ by allocations to national versus regional banks, the types of financial services each bank offers, and ETF fees, among many other differences.
Bottom Line: Best Bank ETFs
If you can’t choose between JP Morgan and Goldman stock, a banking ETF might be for you — and now you know six of the top options.
Keep Reading:
This article is for informational purposes only. It is not intended to be investment advice. Make sure to read more about our editorial guidelines and public equities research framework to better understand how we selected the best banking ETFs.
This article was updated on August 7th, 2022 to reflect relevant changes to the funds’ characteristics and performance.
