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The 5 Top Bank ETFs

The banking sector has perked up lately, as investors anticipate the profit growth that often accompanies rising interest rates. Those who want to invest in a diversified basket of bank stocks can turn to exchange-traded funds that specialize in financials, and you'll find that the top bank ETFs cover a lot of ground within the financial sector. The following five ETFs are among the most popular for bank investors, and they can help you add banking exposure to your investment portfolio.

Bank ETF

Assets Under Management

Expense Ratio

5-Year Average Annual Return

Financial Select Sector SPDR (NYSEMKT: XLF)

$24.3 billion

0.14%

17.5%

Vanguard Financials (NYSEMKT: VFH)

$5.9 billion

0.10%

17.3%

SPDR S&P Regional Banking (NYSEMKT: KRE)

$3.8 billion

0.35%

16.3%

SPDR S&P Bank (NYSEMKT: KBE)

$3.2 billion

0.35%

15.6%

iShares U.S. Financials (NYSEMKT: IYF)

$1.8 billion

0.43%

14.1%

Data source: Fund providers.

Picking up the whole industry

The first thing you need to decide when investing in bank ETFs is what your definition of a bank is. Some investors think of banks as including only retail banking institutions that provide popular services like checking accounts and consumer loans. Yet the financial sector includes a wider variety of companies that include the investment banks that provide financing for major corporate clients, wealth management companies that help investors make their money work harder for them, insurance providers to help clients protect their wealth, and financial services companies that help guide their industry peers through the regulatory and logistical hurdles that banks and other financial institutions face.

Three of the preceding ETFs give investors the widest possible breadth of coverage of the financial sector. The Financial Select SPDR is the largest by far, commanding four times the asset base of the next-biggest competitor. Its top holdings include major U.S. banks, insurance companies, brokerage houses, and credit card companies, and its low expense ratio and high daily trading volume make it an extremely liquid and useful choice for investors.

The Vanguard Financials ETF maintains the company's reputation for low-cost offerings, and its holdings are similar to the SPDR. Diversified banks are the ETF's biggest source of exposure, but you'll also find investments in asset management companies, consumer finance specialists, financial exchanges, and a host of insurance operations.

The iShares Financials ETF is pricier than its peers, and although it tracks a different index, it nevertheless looks similar to the other two broad-based financials funds. Banks, diversified financial companies, real estate, and insurance are the four biggest subsectors represented in the iShares ETF.

Image source: Getty Images.

Drilling down on banks

The other two ETFs on the list do a better job of giving investors exposure only to traditional banks. The SPDR S&P Bank fund includes banks of all sizes, as well as thrifts and mortgage finance institutions, asset custody and management companies, and a small amount of other diversified financial services companies. More than 90% of the ETF is invested in institutions that most people would think of as traditional banks. The specialty comes with a slightly higher expense ratio, but for those who don't want exposure to insurance and other non-banking financial companies, the portfolio is a better fit.

Finally, as its name suggests, the SPDR Regional Banking ETF offers investors an even narrower cross-section of the financials sector, with investments exclusively among regional banks. Smaller regional banks tend to remain closer to their retail banking roots, and they also lack of the systemic risk that the largest banking institutions in the U.S. have. Regional banks have plenty of regulation, but the scrutiny that regulators pay to smaller banks is at least a bit less intense. Moreover, consolidation within the banking industry often leads to larger institutions paying premiums to purchase small regional players, and that can lead to outsize returns as well. You can see a slight edge in recent performance for regionals compared to the all-bank ETF, and that trend could continue if the economy keeps improving.

Find the right bank ETF for you

These top bank ETFs give investors a good range of options for financials investors to choose from. By deciding whether you want the whole sector or just a particular piece of the banking industry, you'll be able to pick the bank ETF that best meets your needs.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.