Established on Dec. 16, 1998, the Financial Select Sector SPDR Fund (XLF) aims to provide investment results similar to the performance of the S&P Financial Select Sector Index by allocating its holdings similar to the index's holdings.

XLF aims to track the financial sector and allocates its fund in the banking, insurance, real estate investment trust (REIT), capital markets, diversified financial services, consumer finance, real estate management and development, thrifts, and mortgage finance industries.

As of April 1, 2021, the Financial Select Sector SPDR Fund's top 10 holdings were Berkshire Hathaway Incorporated Class B (BRK.B), JPMorgan Chase & Company (JPM), Bank of America Corporation (BAC), Wells Fargo & Company (WFC), Citigroup Incorporated (C), Morgan Stanley (MS), Goldman Sachs Group Incorporated (GS), BlackRock Inc. (BLK), Charles Schwab Corporation (SCHW), and American Express Company (AXP).

Key Takeaways

  • The Financial Select Sector SPDR Fund (XLF) seeks to track the S&P Financial Select Sector Index.
  • The fund is an open-end investment entity that is managed by State Street Global Advisors and is listed on the New York Stock Exchange Arca.
  • The fund has an expense ratio of 0.12%, meaning its costs are lower than many exchange-traded funds (ETFs) that track the sector, high liquidity, and a tight bid-ask spread.
  • Capital is allocated to the banking, insurance, real estate investment trust (REIT), capital markets, diversified financial services, consumer finance, real estate management and development, thrifts, and mortgage finance industries.
  • Top holdings of the fund include Berkshire Hathaway, JPMorgan Chase, Bank of America, Wells Fargo, Citigroup, Morgan Stanley, and American Express.

Financial Select Sector SPDR Fund Characteristics

The Financial Select Sector SPDR ETF is an open-end investment company, which is managed by State Street Global Advisors Funds Management Incorporated. XLF is listed on the New York Stock Exchange Arca. As of April 7, 2021, the average daily trading volume of XLF over the past 65 days was 64 million. The high liquidity and the depth of this fund allow for a tight bid-ask spread.

The Financial Select Sector SPDR Fund's gross expense ratio of 0.12% is low, relative to other exchange-traded funds (ETFs) that track the financial sector. State Street Global Advisors is able to maintain that low expense ratio because it engages in securities lending.

Financial Select Sector SPDR Fund Suitability and Recommendations

Investing in the Financial Select Sector SPDR Fund requires a high-risk tolerance. When compared to the SPDR S&P 500 ETF Trust (SPY), the standard deviation of XLF was 40.16% greater than the SPY's standard deviation over the same period.

The financial sector is exposed to a plethora of risks, such as market risk, currency risk, interest rate risk, and macroeconomic risk. Investors and potential investors should follow worldwide economic conditions and keep in mind any economic data that could affect financial companies.

As of March 31, 2021, XLF had a trailing five-year alpha of 0.59, beta of 1.21, R-squared value of 71.11, a standard deviation of 20.80%, and a return of 15.53%. Investors were compensated with a better return (15.53%) than the MSCI ACWI Index, which had a return of 13.21%. With an alpha of 0.59, the XLF outperformed the index by 0.59%.

In that same period, the Financial Select Sector SPDR Fund had a Sharpe ratio of 0.75, while the MSCI ACWI USD index had a Sharpe ratio of 0.86. Therefore, investors were not adequately compensated for the amount of risk they assumed when investing in this fund.

The Financial Select Sector SPDR Fund has a comprehensive portfolio with 65 holdings, which aids in mitigating company risks. The ETF is best suited for investors who are willing to take on an above-average level of risk and pursue overweight exposure to the U.S. financial services industry.

The Bottom Line

The Financial Select Sector SPDR Fund (XLF) is a diversified fund with many blue-chip companies in its portfolio. It covers a variety of industries within the financial sector, has generated strong returns, has high liquidity, and is a medium-cost investment.

For investors looking to gain exposure to the financial services sector, XLF can be a good investment option, depending on the investor's risk profile and investment goals. Investors can also look for similar ETFs concentrated in the financial sector that come with varying expense ratios.