Financial Sector ETF

An ETF (Exchange Traded Fund) is a type of security that tracks and entire index, a set of assets (such as an index fund), or a commodity. ETF’s can be bought, sold, tracked and traded similarly to an index or stock. In simple terms, an ETF is a robust mutual fund (or collection of securities) that provides the stability and diversification advantages of conventional mutual funds, especially when compared to trading individual stocks. Exchange traded funds mitigate and minimize long-term investment risks by allocating funds to various investments, rather than depending on a single stock to perform ideally. It is also possible to save a lot of money that would otherwise be spent in brokerage fees by centralizing your overall investment capital into one transaction. ETF’s are not only more advantageous than individual stocks, they also tend to perform better than managed mutual funds because they provide various tax benefits, a lower expense ratio, and more flexibility within each trade. One type of exchange traded fund in particular that is gaining popularity is the financial sector ETF, which is thoroughly reviewed below.

What Is a Financial Sector ETF?
A financial sector ETF is a type of sector specific exchange traded fund that provides investment coverage for the financial sector of the stock market, which includes brokerage firms, banks, insurance companies, consumer finance companies (such as asset managers and financial advisory firms), mutual fund companies, and even investment trusts. There are 4 different levels of financial sector ETFs currently provided on the market – US/international, global, the main industry companies within the financial sector, and smaller financial entities (such as brokerages). There are also various types of specialty ETF’s within the financial sector, including but not limited to inverse, leveraged, quant strategy, equal weighted, and fundamental index ETF’s. Each of these ETF types have their own advantages and disadvantages, which should be thoroughly reviewed before selecting a suitable type for your investment portfolio.

How to Use a Financial Sector ETF
Although it may not always be a popular decision to invest in a financial sector ETF, with the right techniques it is possible to profit from financial sector ETFs on ongoing basis. However, most financial advisors recommending investing in various sector ETF’s, rather than depending on financial sector ETFs at all times. In fact, alternating and rebalancing between various types of sector ETF’s can help you mitigate financial risk by diversifying your investment and giving you the freedom and flexibility to invest in new opportunities as they become available. To effectively balance your ETF investments you would simply invest in two different types of financial sector ETFs (i.e. – global financial ETF’s and US market ETFs), always ensuring that one type of financial sector ETF is overweighted (is carrying more investment funds). By balancing ETF’s and this fashion you can increase the chances of earning consistent profits in at least one type of financial sector ETF. Ideally, you’ll want to invest in a financial sector ETF that is currently trending amongst momentum-based investors and short-term traders, and always overweight the sector type that is gaining popularity at the fastest rate.

The Pros and Cons of a Financial Sector ETF
Pros – A financial sector ETF’s allow you to capitalize on the overall profitability of the financial sector of the stock market, without having to choose individual stocks, which may or may not perform as planned. By using a financial sector ETF, rather than a self managed portfolio comprised of various stocks, you can simplify the trading process and minimize the risk of incurring losses.

Cons – Since financial sector ETF’s are more heavily concentrated than their broad index counterparts, they can become volatile and are therefore more risky long-term investments if the main stocks of the ETF perform poorly. Although financial sector ETF’s have lower expense ratios than mutual funds, they have higher expense ratios than ETFs that provide investment coverage for a broader index of stocks.

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