S&P 500: If More Banks Crash — Here’s How To Avoid Losing Money
Do you worry that more banks like Silicon Valley Bank and Signature Bank will fall apart? ETFs can protect you from the risk of such bad investments in the S&P 500.
But it takes effort to avoid finances. After all, the financial sector is the third-largest part of the S&P 500 — accounting for 13.2% of the index. But there are both specialized ETFs that avoid the volatile financial sector and strategies that deliberately avoid financial stocks.
“We believe investors should react to the (recent bank failure) developments with some caution as sentiment on bank conditions remains fragile and depositors in other banking institutions may react irrationally to the recent failures,” reads a report by LPL Financial.
How Finances Hurt You
Merely holding financial stocks hurts your returns. Even Warren Buffett loses billions in banking stocks.
Specifically, from March 8, before Silicon Valley’s collapse, to March 20, the S&P 500 fell about 1%, says S&P Dow Jones Indices’ Howard Silverblatt. That’s entirely due to a more than 10% decline in financials. The S&P 500 would rise slightly if financials were removed.
Failures are not the only risk to finance. Rising interest rates also weigh on the financial markets.
Bank and financial ETFs also show the risks. A big 8.5% drop this year in the Financial Select Sector SPDR ETF (XLF) drags the SPDR S&P 500 ETF Trust lower. Including financials, the S&P 500 is up just 3%. But if you take out financials, like the ProShares S&P 500 Ex-Financials ETF (SPXN) does, you’d be up 6%, a three percentage point improvement.
Longer-dated financials are also lagging behind. Financial Select Sector SPDR is up just 13% over the past five years. That lags the S&P 500’s rise of nearly 50% over that time.
Removal of Bank Stocks
The ProShares S&P 500 Ex-Financials is the purest way to own the S&P 500 without banks, insurance companies or brokers.
The ETF omits the roughly 100 financial stocks in the S&P 500. So as long as your top stocks are still standing Apple (AAPL) and Microsoft (MSFT), same as S&P 500, skip 1.6% position Berkshire Hathaway (BRKB), considered a financial and 1.1% position in JPMorgan Chase (JPM).
Some investors could just own ProShares S&P 500 ex-financials if they don’t want to be involved in finance, says Todd Rosenbluth, research director at VettaFi. But the ETF can also be added to a portfolio with an S&P 500 ETF “to reduce exposure to the hardest-hit sector,” he said.
Finance free strategies
Another way to get around financial stocks is with the Invesco QQQ Trust (QQQ). The ETF owns the 100 most valuable companies traded on the Nasdaq, but excludes all financial stocks. That leaves investors with a mostly tech-heavy portfolio.
Information technology accounts for nearly half of QQQ’s portfolio. Tech is followed by a nearly 17% weighting in communications services and a nearly 15% position in consumer discretionary.
“QQQ is a good way to avoid financials as the large-cap growth ETF excludes financials and includes traditional sectors such as communications services, consumer discretionary, healthcare and information technology,” Rosenbluth said.
There is also a lower-cost version, the Invesco Nasdaq 100 ETF (QQQM). QQQM only charges 0.15% versus QQQ’s 0.2% annual fee.
For investors looking to reduce but not eliminate financial stocks entirely, ETFs linked to growth indices are worth considering, Rosenbluth says. For example, the Vanguard Growth ETF (VUG) still has a 3% exposure to financials, he says.
Skipping financials could prove alarming. Meanwhile, the government is aggressively trying to limit further bank explosions amid this crisis. But some ETFs protect you from the sector’s woes no matter what.
Finance hurts S&P 500 performance
ETFs with more financial stocks lag behind
|ETF||symbol||1 year % ch.||YTD % ch.||% in finance|
|Invesco QQQ Trust||(QQQ)||-14.2%||15.0%||0%|
|ProShares S&P 500 ex-financials||(SPXN)||-9.8%||6.0%||0%|
|SPDR S&P 500||(SPY)||-12.5%||2.9%||12.30%|
|Financial Select Sector SPDR Fund||(XLF)||-20.7%||-8.5%||94%|
|SPDR S&P Bank||(CFU)||-34.2%||-20.0%||100%|
|SPDR S&P Regional Banking||(CRE)||-39.9%||-25.9%||100%|
Sources: IBD, S&P Global Market Intelligence, ETF.com
Follow Matt Krantz on Twitter @dull wreath
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