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Investing in financial stocks

How to invest in an industry that drives the economy.

Global and US financial stocks have come under pressure in the last week following the collapse of two US banks, Silicon Valley Bank (SVB) and Signature Bank. Fears of a banking crisis grew after global investment bank Credit Suisse lost funding from its main shareholder just days later, sending its share price falling by more than 30%.

The turmoil has since spread to other financial sector stocks, weighing on the industry across multiple markets. While some may see the lower prices as a buying opportunity, it pays to be aware that the heightened volatility could lead to losses.

What are financial stocks?

The financial sector is one of 11 stock market sectors and plays a crucial role in a healthy economy. This sector includes companies that provide financial goods and services, like mortgage loans and insurance policies, to commercial and retail customers.

What subcategories does it include?

Financial stocks can be classified by the following subcategories:

  • Banking. Diversified and regional banks that hold financial assets for customers and lend to small and medium corporations.
  • Capital markets. Companies that trade securities, like stocks and bonds.
  • Consumer finance. Providers of consumer financing and other services, including credit cards, personal loans and car leases.
  • Diversified financial services. Those that offer a range of products and services, such as banking, insurance and student loans.
  • Insurance. This industry encompasses insurance policies, from life and health insurance to property and car protection.
  • Thrifts and mortgage finance. Financial institutions that primarily offer savings accounts and originate residential mortgages.

How to invest in the financial sector

Invest in the financial sector by buying individual stocks or exchange-traded funds (ETFs). When you purchase a stock, you get shares of that company. Stocks have fewer fees but are riskier than ETFs. If you take the ETF path, you’ll get a basket of financial stocks. You’ll probably see higher fees, but it’ll lower your exposure risk.
Here’s an overview of how to start investing:

  1. Choose a brokerage. Explore brokerage platforms to pick a firm that best fits your financial goals.
  2. Open an account. Most brokerage firms let you open an account online. Some may require a deposit to get started, while others allow you to add money when you’re ready to begin investing.
  3. Research securities. Use your firm’s research tools to browse different stocks and ETFs.
  4. Place an order. When you’re ready to start investing, place an order to buy your security.
  5. Monitor your portfolio. Log into your account to track your securities.

What stocks are in the financial sector?

See how the following stocks are performing, and view details like market capitalization, the price-to-earnings (P/E) ratio, price/earnings-to-growth (PEG) ratio and dividend yield.

What ETFs track the financial sector?

Take a look at the following sector-tracking ETFs:

  • Financial Select Sector SPDR ETF (XLF)
  • Fidelity MSCI Financials ETF (FNCL)
  • Invesco S&P 500 Equal Weight Financial ETF (RYF)
  • Vanguard Financials ETF (VFH)
  • SPDR S&P Insurance ETF (KIE)
  • iShares US Financial Services ETF (IYG)
  • SPDR S&P Bank ETF (KBE)
  • Invesco KBW Property & Casualty Insurance ETF (KBWP)
  • iShares Global Financials ETF (IXG)
  • iShares US Financials ETF (IYF)

How is the financial sector performing?

The graph below tracks the Financial Select Sector SPDR ETF (XLF). Tracking ETF performance is one way to measure how a stock sector as a whole is doing.

Why invest in the financial sector?

The financial sector may be an attractive long-term investment because of its potential for higher returns to help you stay ahead of inflation. For example, the S&P 500 Financials Index’s returned 32.1% in 2019, compared to the Federal Reserve’s estimated inflation rate of 2%.
Long-term trends also support growth in the financial sector. When the sector is strong, the economy thrives, which can lead to higher incomes for consumers and bigger profit margins for companies. As people accumulate wealth, they need a way to manage their funds and plan for retirement.
Another attractive characteristic of financial stocks is their high dividend yield. The sector currently has a 4.19% dividend yield, compared to the S&P 500’s modest 1.96%.

What unique risks does the financial sector face?

The financial sector comes with considerable challenges and risks.

  • Regulation. Government red tape and legislative compliance can be a burden on companies, decreasing profit.
  • Drastic rise in interest rates. When rates rise, lenders generally make more money on the credit they issue to borrowers. But if the Federal Reserve and banks raise interest rates before the economy is ready to adjust to the higher cost of borrowing, demand could drop and potentially trigger a recession. A weak economy can be detrimental to financial stocks.
  • Litigation. Businesses in the financial sector spend a lot on legal proceedings, which can impact profitability and share prices.
  • Weakening economy. Financial stocks are extremely sensitive to changes in the economy.
  • Debt liability. Many financial stocks come with some credit exposure risk. During an economic downturn, borrowers may default on their credit cards and loans, leaving some lenders with a mountain of debt.

Compare stock trading platforms

In order to purchase stocks or ETFs, you’ll need a brokerage account. Compare your options using the table below to find the best fit.

1 - 9 of 9
Name Product USFST Ratings Available asset types Stock trade fee Minimum deposit Cash sweep APY Signup bonus
Tastytrade
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Tastytrade
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Stocks, Options, ETFs, Cryptocurrency, Futures, Treasury Bills
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Finder Score: 4.2 / 5: ★★★★★
SoFi Invest®
★★★★★
Stocks, Options, Mutual funds, ETFs, Alternatives
$0
$0
0.02%
Get up to $1,000 in stock
Zero-commission stocks, ETFs and options, with no options per-contract fees. Plus, a no-advisory-fee robo-advisor and complimentary access to financial planners.
OPTO
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OPTO
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Stocks, ETFs
$0
$0
N/A
Earn up to $300
AI-driven thematic investing, with proprietary research, fractional shares and commission-free stocks and ETFs.
eToro
Finder Score: 4 / 5: ★★★★★
EXCLUSIVE
eToro
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Stocks, Options, ETFs, Cryptocurrency
$0
$0
4.9%
FINDER EXCLUSIVE: Get a guaranteed $15 bonus
No commission stock, ETF and options trades, with 4.9% interest on your options account balance and no options contract fees.
Robinhood
Finder Score: 4.4 / 5: ★★★★★
Robinhood
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Stocks, Options, ETFs, Cryptocurrency
$0
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4.5%
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Public.com
Finder Score: 4.2 / 5: ★★★★★
Public.com
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Stocks, Bonds, Options, ETFs, Cryptocurrency, Alternatives, Treasury Bills, High-yield cash account
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Stash
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Stash
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Stocks, ETFs
$0
$0
0.1%
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Automated investing, individual stock and ETF investing and banking services for as low as $3 per month.
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Finder Score: 4.5 / 5: ★★★★★
Wealthfront
★★★★★
Stocks, ETFs
$0
$500
5%
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Automated stock and bond ETF investing with the ability to trade individual stocks for as little as $1 apiece.
Zacks Trade
Finder Score: 3.8 / 5: ★★★★★
Zacks Trade
★★★★★
Stocks, Bonds, Mutual funds, ETFs, CDs
$0.01
$250
2.83%
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Trade stocks, options, ETFs, mutual funds and bonds, with powerful trading tools and low margin rates.
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Bottom line

The financial sector may be a good choice as a long-term investment in a healthy economy because of its generous dividends and long-term growth potential. But keep in mind that it’s one of the most volatile sectors of the stock market and comes with inherent risks.
Compare online trading platforms to pick a brokerage firm for your investment account.

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Writer

Kimberly Ellis is a personal finance writer at Finder, specializing in banking and financial literacy. After teaching in public and private schools, Kimberly zeroed in on personal financial education to help families and kids develop lifelong money skills. She hails from New York City, graduating summa cum laude from Queens College with a BA in elementary education and mathematics, as well as a New York State teaching certificate. She’s also an aspiring polyglot, always in a book and forever on the hunt for the perfect classic red lipstick. See full bio

Kimberly's expertise
Kimberly has written 89 Finder guides across topics including:
  • Kids' banking
  • Financial literacy for kids
  • K–12 education

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