Financial funds are stock mutual funds or exchange-traded funds (ETFs) that invest primarily in financial stocks. Investors typically buy financial funds for strategic reasons, such as adding exposure during economic environments where financial stocks can outperform the major market indices. Find out if financial funds are right for you and your investment goals.
What Are Financial Funds?
Also known as financial sector funds, financial funds invest primarily in stocks of companies that are in the business of providing financial products and services to consumers. Examples of businesses in the financial sector include banks, credit card companies, insurance companies and brokerage firms. Examples of financial stocks include JPMorgan Chase (JPM), Bank of America (BAC) and Berkshire-Hathaway (BRK.A, BRK.B).
The Outlook for Financial Funds
Now may be one of the best times in history to invest in financial stocks. Companies in the financial industry have been able to increase profits by finding new and innovative ways to deliver financial products and services to consumers at a low cost. Banking, brokerage and credit card companies can be easily accessed on the internet and through applications on mobile phones.
Also, the largest segment of the U.S. population, the baby boomer generation, is dramatically increasing the demand for financial products and services. Born between 1946 and 1964, the baby boomers are either in retirement now or are nearing retirement age. Over the next 25 years, it is estimated that the greatest transfer of wealth in history will occur, as the children of baby boomers, Generation X, inherit their parents’ assets.
This transfer of wealth is estimated to be $48 trillion.
The current outlook for financial stocks is not as strong as the long-term outlook. In recent years, financial stocks enjoyed healthy growth, but 2018 was negative for average financial funds and 2019 performance is on par with the S&P 500, at best. This mixed performance may be attributed to a healthy but slowing U.S. economy and an uncertain interest rate environment.
Best Financial Funds to Buy for the Long-Term
When choosing financial funds and other sector funds, investors generally have a choice between actively-managed funds, index funds and specialty funds. Also, the financial funds may be either mutual funds or exchange-traded funds (ETFs). Since sector funds may come in and out of favor, making it difficult to time the purchase of the funds, investors are wise to buy with the intention of holding for the long-term (several years or more).
Here are three of the best financial funds to buy for the long term:
- Davis Financial Fund (RPFGX): Perhaps the best actively-managed financial fund on the market, Davis Financial benefits from a long history of investing in financial stocks. Fund manager Christopher Davis has been either an analyst or manager at Davis funds for 30 years. This experience has helped to boost long-term returns (5 years or more) ahead of at least two-thirds of other financial sector funds. RPFGX has a front load of 4.75% and an expense ratio of 0.96% (as of May 2021). Some investors may qualify for load-waived shares, which do not have a sales charge.
- Fidelity Select Banking (FSRBX): If you want to focus on the banking sub-sector within the broader financial sector, FSRBX is a smart choice. The fund primarily invests in large U.S. banks, such as Wells Fargo (WFC), PNC Financial Services (PNC) and CitiGroup (C). Expenses for FSRBX are 0.79% as of May 2021.
- Vanguard Financials ETF (VFH): Investors wanting a low-cost index fund that invests in a broad variety of financial stocks will like what they see in VFH. The portfolio tracks the MSCI US Investable Market Index, which consists of over 400 stocks in the financial sector. Expenses for VFH are just 0.10%.
Investors are wise to maintain a long-term outlook for financial funds. In the short-term, financial stocks may have already put in their best gains. However, the long-term outlook remains healthy for financial funds. Along with the technology and health sectors, the financial sector has a strong growth outlook. Macroeconomic factors, such as an aging population and advances in productivity from technology, will likely continue to support financial stocks.
Disclaimer: The information on this site is provided for discussion purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.