High returns with financial sector ETFs? You have to keep that in mind!

Banks, insurance companies and the like have been growing significantly faster than the rest of the market for years. This makes an investment in financial sector ETFs particularly attractive! At the same time, however, there are fears of a bubble that could burst at any time.

This is not an easy environment for investors who want to profit from this sector. However, the risk can be reduced with a financial sector ETF: Good diversification meets high returns!

I have analysed the advantages and disadvantages of ETFs from the financial sector for you in detail and what you should look out for when investing. You can also find out which specific products are available and what characterises them.

This is what the financial market looks like today

The financial sector is extremely broad and multi-faceted. It not only includes traditional banks, investment banks and insurance companies! It also includes credit card companies and payment services, leasing companies and credit brokers, as we know them from the P2P sector.

With the ‘FinTech’ sub-sector, there is also a still young industry that is receiving special attention: innovative companies and courageous start-ups offer financial services that fully utilise current technical possibilities.

The use of our smartphones, artificial intelligence, cloud solutions and more is creating interesting offers that can quickly inspire millions of people – or disappear into insignificance.

Investors naturally want to participate in these attractive developments, but the fast-moving FinTech sector in particular makes it difficult to get in! IPOs often only take place when the interesting development phase has already been completed. And screening individual companies to find the best candidates is extremely time-consuming.

However, ‘traditional’ financial products also continue to guarantee high revenues: Billions are earned through investment banking, asset and portfolio management, financing, advisory services and the lending business.

Even the ETFs for the financial market itself are offerings from which the responsible companies earn directly! And although exchange-traded funds have become massively more popular in recent years, actively managed funds are still available – with equally high revenues for the financial institutions.

Key interest rate hike: positive impetus for the financial market

Key interest rates in Europe and the US rose in 2022 for the first time in years. This is generally seen as a positive impulse for the financial sector. The era of cheap loans seems to be over for the time being – lending money could become really lucrative for the sector again.

Although we are currently in a downward spiral of falling economic growth, high inflation and an uncertain supply of raw materials, investors are already seeing the light at the end of the tunnel.

A recovery in the economic situation would bring new investments. In combination with higher interest rates, this could result in considerable profits for the financial sector. Many investors are currently entering the market with large sums of money in order to profit from precisely this development.

In addition, the financial sector recently showed an above-average recovery after the coronavirus crisis. While other sectors of the economy often took several months to return to their previous levels, banks and other financial institutions did so in a much shorter time.

Why a financial sector ETF?

Exchange traded funds (ETFs) are financial products that allow us to invest in numerous companies at once. Here, however, no highly paid manager selects the respective shares! Instead, prefabricated indices are automatically replicated.

Very specific rules can be applied here: Companies from a specific sector, region, size, age, dividend yield and more can be filtered here. It is even possible to map sustainability or social responsibility.

The range of ETFs in the financial sector, industry, energy, healthcare and many other areas is correspondingly extensive. As such a fund contains dozens of companies, our investment risk is reduced.

If we buy shares in an ETF in the financial sector, we acquire (a proportion of) the securities of numerous companies. If one of them performs poorly, only a very small proportion of our assets will be affected.

If, on the other hand, a company experiences strong growth, we are also only invested with a small amount – unfortunately, we only benefit to a small extent in this case. A financial sector ETF therefore offers an investment in a large area of the financial world in which we are less affected by drastic swings (both positive and negative) in individual shares.

As many investors expect the sector to continue to grow, an ETF for the financial sector can be a sensible investment product. However, in the event of a price slump or serious difficulties, considerable losses are possible.

Risks for the industry

The financial industry has been increasingly deregulated in recent decades and has benefited significantly as a result. Today, however, it no longer has any connection to the actual economy in many areas. Banks and the like generate ‘profits’ in a matter of seconds that have no real countervalue.

This has led to a huge increase in the amount of money in circulation. Only around 2% of euros, dollars and the like still have a real equivalent value today. The remaining 98 % was created on screen and are pure fantasy values. They only have purchasing power because the economy and consumers accept them.

The result is an enormously bloated financial industry that is now around twice as big as it was 20 years ago. It is rarely a service provider for people and companies. Instead, it often siphons off value that has been created elsewhere.

This parasitic behaviour causes considerable damage to the general public. The 2008 financial crisis, for example, deprived millions of people of their livelihoods – the consequences are still being felt today.

In addition, there are a large number of illegal practices or procedures that are located in legal grey areas. From everyday crimes such as tax evasion to the scandals that regularly rock the financial market. However, due to massive political influence, there are hardly any consequences.

Anyone who decides to invest in an ETF from the financial sector should be aware of the dangers: The enormous size of the sector is already being labelled by many experts as a bubble that could burst in the short term. In this case, investors would have to accept heavy losses, as extreme price falls or even insolvencies could be expected.

In addition, investors interested in financial ETFs should be aware of the moral component of their actions. For example, with an ETF for renewable energies, investors are putting their money towards positive change. Under certain circumstances, an ETF from the financial sector can have the opposite effect and exacerbate existing grievances.

Anyone opting for a financial sector ETF or similar products should also be aware of the high volatility of the industry: Financial institutions, insurance companies and the like react very strongly to market developments. They lose considerably in times of crisis, but gain all the more when things pick up again.

They are therefore more suitable as a medium or long-term investment. With short investment periods, the industry may be in crisis just when we want to withdraw our money.

98/100

Points

1,300 ETFs suitable for savings plans

supervised by German regulator

2% interest for new customers

REDEEM BONUS*

ETF for finance – these products are available

There are numerous financial sector ETFs available for investors who want to invest in the sector. While some of them are largely similar, there are also special offers and special features.

The products are predominantly characterised by very good performance in upward trends. However, financial securities also lose considerable value in times of crisis or prolonged market downturns.

The best-known products include

1. MSCI World Financials UCITS

The MSCI World Financials UCITS is a popular index on which several financial ETFs are based. It specialises in industrialised nations, with a particular focus on the USA, which accounts for the majority of shares (over 50%).

Investors who want to invest in this index have the choice between various financial ETFs. Various companies (Xtrackers, Lyxor, Armundi…) offer suitable products, which may differ in terms of volume and costs.

The result is a solid performance: investors who invested here three years ago, for example, can look forward to a gain of around 40 per cent! In times of crisis, however, the high volatility of the sector becomes apparent: during the Covid crisis, these financial ETFs lost almost 22 per cent of their value!

With a volume of over €500 million in some cases, the risk of these financial sector ETFs closing is usually low. Offerings such as the Xtrackers MSCI World Finance have been available since 2016 and are characterised by a low cost factor: with a fee of 0.25% per year, it is one of the cheapest financial ETFs.

2. HANetf Grayscale Future of Finance UCITS ETF

With the Grayscale Future of Finance UCITS ETF, HANetf offers investors the opportunity to invest in companies that could influence and shape the future of the financial sector.

An investment in future success is of course associated with considerable risks, as the actual success of the companies included is not certain. In addition, this is a very young and small financial ETF: it has only been available since May 2022 and has a volume of just €2 million to date.

After an initial lean period, investors can now realise their first profits: Anyone who got in a month ago is already up almost 30 per cent today!

3. MSCI Europe Financials

Those who prefer to invest in the domestic financial sector are well advised to use products based on the MSCI Europe Financials Index. Specific financial ETFs are offered by Xtrackers, SPDR and iShares, among others.

They are all characterised by a performance that reflects the high volatility of the sector: Investors alternated between a loss of almost 20 % and a profit every year!

Just under a quarter of the companies included are based in the United Kingdom. This is followed by around 15 per cent from Switzerland and 12 per cent from Germany. At almost 10 per cent, HSBC has the largest share of the companies.

4. iShares STOXX Europe 600 Financial Services UCITS ETF

The iShares STOXX Europe 600 Finacial Services UCITS is also focussed on Europe, but offers a completely different composition. Switzerland is the most strongly represented nation here with more than 30 %!

For many investors, this financial ETF could be an opportunity to diversify their investment. The United Kingdom is also strongly represented with just under 26%, while Germany is in third place with around 10%.

The performance of the past year is in the deep red; however, investors have already been able to realise considerable gains in the past. For example, this financial sector ETF posted a record gain of 44% in 2019!

Although the iShares STOXX Europe 600 Financial Services has been on offer since 2002, it has only managed to accumulate a volume of just under 90 million euros to date. Not a particularly good value, which leads to a considerable risk of closure! Nevertheless, courageous investors could speculate on further highs in the future.

5. Invesco KBW Nasdaq Fintech UCITS ETF

Unfortunately, there is not much choice for those who want to enter the still young fintech sector through a financial ETF. The KBW Nasdaq Fintech UCITS from Invesco is still one of the best options.

It has been available since 2017, but has only managed to accumulate a volume of 64 million euros in this time. To make matters worse, this financial ETF consists exclusively of US companies and is comparatively expensive with annual costs of almost 0.5 per cent.

However, its performance does not have to hide behind other ETFs from the financial sector: With past records of 37% gains per year, impressive results have already been achieved. Even if the current trend is rather negative.

Due to its structure and objective, this financial ETF offers considerable potential for further increases in value. However, it must be categorised as a rather risky investment option, particularly due to the lack of diversification.

98/100

Points

1,300 ETFs suitable for savings plans

supervised by German regulator

2% interest for new customers

REDEEM BONUS*

Conclusion: High returns, high risk

The financial industry has been a guarantor of the highest returns for decades. Unfortunately, the industry is always hit hard by crises and downturns. These developments also have a massive impact on all ETFs in the financial sector!

Investors must be able to ride out price slumps and wait until the next peak to realise price gains. Those who are able to do this will find a very lucrative investment in the financial sector!

Numerous financial ETFs are based on the same indices. Anyone planning to invest should therefore compare them first: Not all offers have a sufficient volume (at least 300 million euros), reasonable costs or are available from all brokers.

There are many ETFs available that invest in the entire financial sector. Investors can also find plenty of regionally limited financial ETFs. However, it is more difficult to focus on specific sub-sectors such as fintech or future-oriented companies.

For many investors, financial ETFs are nevertheless an important part of their own investment strategy. Although they are anything but crisis-resistant and come with considerable risks for the future, their performance over several years has always been very lucrative!