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The Financial Select Sector SPDR (XLF) is an ETF designed to offer investors exposure to the broader financial sector of the S&P 500 index. The biggest and most influential companies that offer various financial services in the U.S. are captured in this fund. The XLF has been structured to deliver investment results that mirror the performance of the Financial Select Sector Index. Founded on the 16th of December 1998, by State Street Global Advisors, the XLF provides a cost-effective gateway to participating in the powerful U.S. financial sector. The ETF trades on the New York Stock Exchange Arca under the ticker symbol XLF.
The financial sector is known for its volatility, and this is reflected in the price history of the fund. XLF started out at circa $20 and it remained contained within a tight range of $15-$25, until 2003 when a gradual rally that started at levels of circa $16, printed highs at just above $30 by June 2007. The subsequent global financial crisis of 2008 inspired a tumble of the XLF to all-time lows of circa $6. Since then, the ETF sustained a multiyear rally that revisited all-time highs of above $31 in January 2020. The coronavirus pandemic initially sent the XLF to lows of just below $20, but the ETF then recovered to trade above those levels, as of August 2020. Overall, the XLF is considered a volatile ETF that offers plenty of trading opportunities for risk-tolerant investors.
At the time of writing, the XLF has about 66 stocks included in the ETF that must meet the following conditions:
XLF is rebalanced quarterly in March, June, September and December for reweighting purposes. The calculation frequency is in real-time, and the calculating currency is the US dollar (USD). The top 10 stocks in the XLF as of August 2020 are:
Banks carry the largest industry weight in the fund at 36.15%, followed by Capital Markets at 26.73% and Insurance at 19.11%.
XLF is in a sector that has been a major target of legislation since the 2008 global recession that was caused by the escalation of financial risk by major firms. This is a concern that investors must be wary of when trading the XLF. XLF is a generally volatile ETF, which reacts very fast to the underlying market, economic and political conditions. Major factors that affect the stock market, such as interest rates, political events and market sentiment as well as the prevailing economic conditions, impact the XLF almost in real-time. The price of XLF is also impacted by changes in prices of individual stocks of major constituents, such as Berkshire Hathaway and Bank of America, or significant changes in a top major industry, such as banks. This means that events, such as corporate earnings or industry-wide announcements, should be tracked accordingly.
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If you are looking for a diversified way to invest in the financial sector, including banks, insurance, investing funds and more, then the Financial Select Sector SPDR is the way to go. It is also an excellent way to play the short-term movements in the financial sector, which can be quite volatile in response to economic news. The financial sector is particularly sensitive to interest rates and a strategy that trades this ETF on interest rate news can be quite successful for a nimble investor.
There are so many funds that follow different areas of the financial sector that it is impossible to call any one of them the best. That aside, the Financial Select Sector SPDR is an excellent way to speculate on the movement in the U.S. financial sector. With more than 60 of the top financial firms from the S&P 500 included in the fund it is an excellent proxy for the S&P 500 financial sector. If you are looking for a way to capitalize on movements from the financial sector without the need to analyse individual stocks, then the Financial Select Sector SPDR may be the best ETF for you.
The financial sector tends to be quite cyclical, which means it follows very distinct patterns in response to the economy. The first part of any strategy for trading an ETF that follows the financial sector is to understand this cyclical nature. Trades must be taken in the same direction as the overall trend to have the best chance of success. In addition, traders can use strong areas of support and resistance as turning points for the market. Traders who are fundamentally inclined may want to trade the Financial Select Sector SPDR based on news events, focusing on any news that has an impact on interest rates.