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Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.
When most people hear the term "financial sector," they think of banks. Although this is certainly the largest part of the financial sector, several other types of companies are included in the sector as well.
These are some mature, easy-to-understand financial sector businesses that are smart choices for beginner investors:
As for financial sector exchange-traded funds (ETFs), the Vanguard Financials ETF (NYSEMKT:VFH) may be the best. The fund confers portfolio exposure to the entire financial sector and for a low 0.1% expense ratio (annual investment fee). The fund provides exposure to a total of 377 different financial sector stocks, weighted according to their market capitalizations. (More of the fund's assets are invested in the larger financial companies.) In addition to the three companies already mentioned, top holdings include Bank of America (NYSE:BAC), Citigroup (NYSE:C), BlackRock (NYSE:BLK), and Morgan Stanley (NYSE:MS).
Several different types of companies make up the financial sector besides just banks. Companies in the financial sector vary widely by function, size, growth potential, and other factors.
Financial stocks can be broken into several categories, including:
Banks may seem complicated, but the way they make money is pretty straightforward.
Combine finance and technology and you get companies in this space.
Insurance companies can produce great returns no matter what the economy.
This form of ledger technology is what's behind cryptocurrencies and other tech trends.
Investors can evaluate financial industry investments by using both the standard metrics, such as the price-to-earnings (P/E) ratio, and those that are customized to this sector. For the banking and insurance subsectors of the financial industry, there are some particularly important metrics for investors to consider.
These metrics are especially useful for analyzing bank stocks:
Bank stocks have been some of the worst performers during the COVID-19 pandemic. Financial stocks — especially banks — can be cyclical, meaning they’re vulnerable to losing value during recessions. When unemployment rises, consumers and businesses often struggle to pay their bills, which can lead to large amounts of bad debt for banks.
Be aware of the risks before investing, and, when conducting your analysis, consider the overall outlook for a financial company, not just one or two metrics. Also remember that financial sector stocks are best suited as long-term investment vehicles.
So many factors can influence financial stock prices in the near term, and many of those factors — such as weak economic conditions or falling interest rates — have little to do with the strength of the business itself. If you have an investment time horizon of five years or more, then adding some of the best financial sector stocks to your portfolio is likely a wise choice.
These are smart choices for beginner investors:
As for financial sector exchange-traded funds (ETFs), the Vanguard Financials ETF (NYSEMKT:VFH) is the best.
Financial stocks can be broken into several categories, including:
Bank stocks are near the middle of the risk spectrum. They can be recession-prone and are sensitive to interest rate fluctuations, just to name two major risk factors. But, like most other types of businesses, the risk associated with bank stocks can vary tremendously between companies.
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