Renowned investor Warren Buffett‘s reputation is built on his significant investment in Apple (AAPL), but his second-largest sector position, financials, is now reaping rewards, providing an opportunity for investors to participate through ETFs.
Within Warren Buffett’s Berkshire Hathaway (BRKB) holdings, financial stocks, including Bank of America (BAC) and American Express (AXP), constitute over 21% of the portfolio, according to data from S&P Global Market Intelligence and MarketSmith. This allocation ranks second only to the dominant 48% weighting in technology stocks, predominantly Apple.
Lately, Buffett’s inclination towards financials is proving fruitful. The Financial Select Sector SPDR Fund (XLF) has surged by 7.6% since the start of June, outperforming the S&P 500’s 5.2% growth during the same period and leaving the Technology Select Sector SPDR ETF (XLK) and its 1.2% uptick in the dust. Furthermore, S&P 500 financials boast a yield of nearly 2%, in stark contrast to the mere 0.7% offered by tech stocks.
Buffett’s strategic diversification beyond S&P 500 tech stocks reflects an ongoing market shift. The “Magnificent Seven” big-cap tech stocks, which had led for most of the year, are facing challenges in August.
Whitney Tilson from Empire Financial Research has long hailed Berkshire Hathaway as “America’s No. 1 Retirement Stock,” underlining its unique blend of safety, growth, and undervaluation.
Warren Buffett’s Financial Bet Pays Off
While financial stocks might not possess the same allure as tech giants, their recent performance shines a light on their resilience.
Bank of America and American Express, holding the second and third largest positions in Berkshire Hathaway’s public portfolio, trail only behind Apple. Bank of America’s market value accounts for 9.2% of Berkshire’s U.S.-listed holdings, a significant figure despite being dwarfed by Apple’s 49%. Berkshire Hathaway’s ownership in Bank of America stands at nearly 13%, contrasting with its 5.8% stake in Apple.
In terms of recent performance, these financial stocks are eclipsing even Apple. Bank of America’s shares have risen by 5.4% since June, overshadowing Apple’s 0.4% loss. Similarly, American Express shares have enjoyed a 1.4% increase during the same period.
Navigating the World of Financial ETFs
For those seeking exposure to the financial sector without the intricacies of stock selection, ETFs present an enticing avenue.
It’s important to note that financial ETFs vary significantly from one another, with performance ranging from 2.3% to 14.9% since June 1 among the top 10 largest financial ETFs.
The largest financial ETF, the Financial Select Sector SPDR, boasts assets exceeding $34 billion, offering comprehensive exposure to various financial components, including banks, insurance, and mortgages. Interestingly, the ETF’s premier holding is none other than Berkshire Hathaway itself at 13.4%, followed by JPMorgan Chase (JPM) at 9.5%. While this ETF is the largest and most diversified, its performance has reached 7.6% growth since June, with a slight dip of 0.1% year-to-date.
ETFs focusing on banks, however, have outperformed in the same period. The SPDR S&P Regional Banking ETF (KRE), with assets totaling $3 billion, has surged by 15% since June. Nevertheless, a caveat applies, as it remains down by 24% for the year, stemming from concerns about bank failures earlier in the year. Its top holding, Western Alliance (WAL), accounts for 2.4% of the portfolio.
Prudence in Banking Investments
Caution is advised despite the recent momentum observed in bank stocks, as the regulatory landscape tightens, potentially challenging their lending operations. Jack Ablin, Chief Investment Officer at Cresset Capital Management, emphasizes that financials are already the third-largest weighting at 12.6% within the S&P 500. He suggests that while improvement in economic conditions is boosting bank stocks, it might be premature to heavily invest, given the potential hurdles posed by regulations. Consolidation within the banking sector could also be a factor to watch, as larger entities consider acquiring smaller counterparts.
