Navigating Finance ETF Options: A Guide for Rising Rate Environments

The financial services sector represents a commanding 13.79% of the S&P 500 as of late August, ranking third behind technology and healthcare in this key benchmark. When the interest rate cycle shifts upward—as we’re currently experiencing—many investors instinctively turn their attention to finance ETF offerings. The relationship between rising Treasury yields and financial sector performance has historically been positive, though past results certainly don’t guarantee future outcomes.

A telling metric: the Financial Select Sector SPDR (XLF), the largest finance ETF by assets under management, has gained merely 2% year-to-date. Compare that to the broader S&P 500’s performance, and you’ll see XLF is lagging by a four-to-one margin. This underperformance highlights why savvy investors are exploring alternative finance ETF structures beyond the traditional market-cap weighting approach.

Low-Cost Finance ETF Solutions

Fidelity MSCI Financials ETF (FNCL) stands out as a particularly cost-efficient entry point into the finance ETF space. With an expense ratio of just 0.084% annually, this fund charges only $8.40 per year on a $10,000 investment. Fidelity clients benefit further since the company waives commissions on its ETF trades.

FNCL’s portfolio spans 388 holdings, significantly broader than many rivals. The fund tracks the MSCI USA IMI Financials Index and maintains meaningful exposure to smaller financial companies alongside its core positions in mega-cap banks like JPMorgan Chase and Bank of America. This diversified finance ETF approach has attracted substantial inflows of $381.30 million, as cost-conscious investors increasingly recognize the value proposition.

Small-Cap and Specialized Finance ETF Strategies

For investors seeking small-cap exposure within the finance ETF universe, Invesco S&P SmallCap Financials ETF (PSCF) offers a compelling alternative. Trading at a 0.29% expense ratio, this finance ETF has delivered 9.6% returns year-to-date, outpacing the broad S&P 500 despite trailing its small-cap benchmark peers.

PSCF’s composition includes notable real estate weighting (over 31%), which acts as a performance headwind given real estate’s inverse correlation to rising rates. However, with more than 36% allocated to value stocks and 134 holdings averaging $1.96 billion in market capitalization, this finance ETF captures meaningful small-cap appreciation themes.

A niche opportunity exists within ETF Industry Exposure and Financial Services ETF (TETF). This 0.64% expense ratio finance ETF provides direct participation in the expanding ETF ecosystem itself—from fund sponsors to data providers to trading platforms. TETF’s 43 holdings span the entire infrastructure supporting the $25 trillion ETF opportunity BlackRock projects over the next five years. The finance ETF has outpaced traditional offerings by 350 basis points over the past twelve months.

Regional Banking and Income-Focused Finance ETF Solutions

Regional bank finance ETFs deserve attention for rate-sensitive investors. The SPDR S&P Regional Banking ETF (KRE) utilizes equal-weighting methodology and has delivered 8% gains year-to-date—substantially outpacing diversified finance ETF alternatives. Rising rates expand net interest margins for regional lenders, creating powerful tailwinds for this finance ETF structure.

The First Trust NASDAQ ABA Community Bank Index Fund (QABA) represents a lesser-known finance ETF commanding $404 million in assets. This 169-holding fund targets small-cap regional banks with positive leverage to rising rate environments. With over 21% combined exposure to California and Texas—America’s largest state economies—this finance ETF concentrates on vibrant regional markets.

Private Equity Finance ETF Access

The Invesco Global Listed Private Equity ETF (PSP) takes a distinctly different approach to finance ETF exposure. At 2.03% annually, PSP carries substantially higher fees than traditional finance ETF alternatives, but compensates through a 9.9% distribution yield. This finance ETF democratizes private equity access typically reserved for institutional investors by tracking 40 to 75 publicly traded private equity vehicles, including business development companies and master limited partnerships.

The finance ETF landscape offers multiple pathways tailored to different investment objectives—from ultra-low-cost index exposure through FNCL to specialized plays on the ETF infrastructure boom through TETF, or tactical income strategies via PSP. Understanding which finance ETF structure aligns with your rate outlook and risk tolerance remains essential in today’s market environment.