Montana Money: How to Trade the Financial Sector and Banks with ETFs
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How to Trade the Financial Sector and Banks with ETFs


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The financial sector not only includes banks, but also brokerage firms, insurance companies, real estate companies, credit services and more. The financial sector can be a good place at times to invest or trade.With the following ETFs, you can trade or invest in the entire financial sector or just the areas you are interested in. You can profit in a bull or bear market with these ETFs.


Many times you can make a nice profit trading only a certain sector of the stock market. You can trade the sector long or short and the financial sector and banks is one of those stock market sectors.

Financial Sector Industries


The financial sector contains many different industries that deal with everything financial from banks to title insurance companies and more including:

  • Health insurance
  • Closed end funds
  • Credit Services
  • Insurance brokers
  • Life insurance companies
  • Brokerages
  • Mortgage investments
  • Property and life insurance
  • Property management
  • Banks and regional banks from six different regions of the United States
  • Savings and Loans
  • Real estate development
  • REIT (Real estate investment trusts) broken down into seven sectors like residential, commercial and healthcare.

Trading Long or Short the Financial Sector


The financial sector is a very important and has certainly been in the news since the recession of 2008 started. You could have made a nice profit had you shorted the financial sector and especially the banks in 2008.

Shorting stocks in your own account can be risky and you have to a margin account with your broker to be able to short stocks. With inverse ETFs you can short the financial sector without having a margin account. Inverse and leveraged ETFs can be risky. If you are not familiar with the risks, please read The Compounding Errors of Leveraged ETFs.

Once the stock market started to turn around again by mid 2009, many of these financial sector industries and companies, especially banks, started to gain. You could have made a profit once again trading the financial sector to the long side using ETFs.

ETFs can be used as a long term position in your portfolio instead of a mutual fund to cover many companies in a certain sector. But leveraged ETFs do become riskier and are better held for a short term and should be watched carefully.

ETFs to Trade the Financial Sector and Banks


When you want to trade long the financial sector, you believe this stock market will gain. It might gain for the day on good financial or bank news, or it might gain for a longer period of time. You believe the financial sector overall will, but you are not sure of which industry or individual companies in the financial sector will gain. You can capture the sector gains with the following ETFs. You will need to research each of these funds since they can hold different companies or industries of the financial sector. If you are more interested in banks, look for ETFs that have a large holding in banks or regional banks. Or you might be interested in the real estate sector and so forth. Morningstar is a great place to research these ETFs.

  • Vanguard Financials ETF (VFH) at this time holds more than 400 cap-weighted companies in the financial sector. Their top holdings include JP Morgan Chase, Wells Fargo, Citigroup, Bank of American and Berkshire Hathaway.

  • iShares Dow Jones US Financial Sector (IYF) holds more than 200 companies and is a cap-weighted ETF. Its top holdings are the same as VFH. This fund has approximately 33% of financial companies in the insurance and REIT industries.

  • iShares Dow Jones US Financial Services (IYG) excludes insurance companies and REITS with top holdings including JP Morgan Chase, Wells Fargo, Citigroup, Bank of America and Goldman Sachs.

  • Financial Select Sector SPDR (XLF) has a broad range of the financial companies in the financial sector. Its top holdings include the same as the above funds also including American Express, MetLife and Simon Properties.

  • Rydex S&P Equal Weight Financials (RYF) holds more of the smaller companies and invests 21% in the real estate sector with companies like Simon Properties, Apartment Investment and Management, E*Trade,  ProLogis and Equity Residential.

Banks, Insurance and Brokerage ETFs


These ETFs can be bought if you are interested in trading or investing in national banks, large regional banks, and insurance or brokerage companies.

  • SPDR KBW Bank (KBE) holds the usual large banks but also includes Fifth Third, Huntington Bank, SunTrust and Capital One.

  • SPDR KBW Insurance ETF (KIE) holds large insurance companies like Prudential, Aflac and Travelers.

  • Regional Bank HOLDRs (RKH) invest mainly in large national banks.

  • iShares Dow Jones US Broker Dealers (IAI) holds brokerage and exchanges like Goldman Sachs, E*Trade, Charles Schwab, NYSE Euronext and NASDAQ OMX Group.

  • SPDR KBW Regional Banking (KRE) is a good equal-weighting ETF that invests in 50 regional banks including SVB Financial Group, First Midwest Bancorp and Community Bank System.

  • SPDR KBW Capital Markets (KCE) invests is much like IAI, holding brokerages, exchanges and capital markets companies like State Street, T. Rowe Price, Raymond James and Morgan Stanley.

Leveraged Bull Financials ETFs


Leveraged and inverse ETFs should be traded on a daily basis. One reason for this is what is called volatility drag or the compounding error of leveraged ETFs. Whether you believe the financial sector will go up or down, you can find leveraged or inverse ETFs for the financial sector. Here are some of those ETFs.

  • ProShares Ultra Financials (UYG) is a 2x leveraged ETF that replicates 200% of the daily Dow Jones Financials Index.

  • Direxion Daily Financial Bull 3x (FAS) is a leveraged that seeks 300% of the daily performance of the Russell 1000 Financial Services Index.

Leveraged and Inverse ETFs


  • ProShares Short Financials (SEF) is an inverse ETF that tries to replicate the inverse of the daily results of the Dow Jones US Financials Index.

  • ProShares UltraShort Financials (SKF) is a 2x leveraged inverse ETF that replicates 200% the opposite of the daily Dow Jones Financials Index.

  • Direxion Daily Financial Bear 3x (FAZ) is a leveraged inverse ETF that seeks the daily inverse (opposite) 300% of the Russell 1000 Financial Services Index.

Financial Sector Conclusion


Trading the financial sector can be more risky than holding an ETF like a broad S&P 500 fund like SPY. Owning both the broad S&P 500 ETF and a broad financial sector ETF could cause an overlap or owning more percentage of banks and other financial sector stocks in your portfolio. Do your research for each of these ETFs and find the ones that hold the stocks you are interested in to trade in the financial sector during a bear market or stock market correction.

Copyright © August 2011 Sam Montana



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Labels: ETFs, financial sector, inverse ETFs, investing, sector ETFs

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