The XLF Financial Sector ETF Puts 25% of Your Money in Just Two Stocks

Core Insights - The XLF Financial Sector ETF has a significant concentration, with nearly 25% of its assets in just two stocks: JPMorgan Chase and Berkshire Hathaway [1] - Over the past year, XLF returned only 1.28%, underperforming the S&P 500, which gained 11.81%, due to weakened bank margins from rate-cut expectations [1] - The fund's top two holdings create substantial single-stock risk, despite its ETF structure, as performance is heavily reliant on these mega-cap financials [1] Fund Composition - XLF holds 86.2% of its portfolio in financials, making it a concentrated bet on the financial sector's health [1] - The fund includes payment networks like Visa and Mastercard, which provide some diversification within the financial sector [1] - XLF has a competitive expense ratio of 0.1% and maintains a low turnover rate of 6%, indicating a buy-and-hold strategy [1] Performance Analysis - Bank profitability is closely tied to net interest margins, which have been pressured by rate-cut expectations, contributing to XLF's recent underperformance [1] - Over a five-year period, XLF has slightly outperformed the S&P 500, compounding at 78.61% compared to 73.63%, but with higher volatility [1] - Financial sector returns are cyclical, performing well during economic expansions with rising rates but weakening during rate cuts or recession risks [1] Investment Considerations - Investors in XLF face significant sector concentration risk, as underperformance in financials lacks cushioning from other sectors like technology or healthcare [1] - The fund is highly sensitive to interest rate policies and economic cycles, making it more vulnerable during recessions compared to diversified equity exposure [1] - XLF is suitable for investors seeking targeted financial sector exposure while accepting the trade-off of reduced diversification [1]