Financial stocks encompass more than only Wall Street. This sector touches many aspects of a consumer’s economic life, from credit cards to mortgages, including the insurance on your new home. A strong financial sector is indicative of a healthy economy. But these stocks come with unique risks.
What are financial stocks?
The financial sector is one of 11 stock market sectors and plays a crucial role in a healthy economy. This sector includes companies that provide financial goods and services, like mortgage loans and insurance policies, to commercial and retail customers.
What subcategories does it include?
Financial stocks can be classified by the following subcategories:
Banking. Diversified and regional banks that hold financial assets for customers and lend to small and medium corporations.
Capital markets. Companies that trade securities, like stocks and bonds.
Consumer finance. Providers of consumer financing and other services, including credit cards, personal loans and car leases.
Diversified financial services. Those that offer a range of products and services, such as banking, insurance and student loans.
Insurance. This industry encompasses insurance policies, from life and health insurance to property and car protection.
Thrifts and mortgage finance. Financial institutions that primarily offer savings accounts and originate residential mortgages.
How to invest in the financial sector
Invest in the financial sector by buying individual stocks or exchange-traded funds (ETFs). When you purchase a stock, you get shares of that company. Stocks have fewer fees but are riskier than ETFs. If you take the ETF path, you’ll get a basket of financial stocks. You’ll probably see higher fees, but it’ll lower your exposure risk.
Here’s an overview of how to start investing:
Choose a brokerage. Explore brokerage platforms to pick a firm that best fits your financial goals.
Open an account. Most brokerage firms let you open an account online. Some may require a deposit to get started, while others allow you to add money when you’re ready to begin investing.
Research securities. Use your firm’s research tools to browse different stocks and ETFs.
Place an order. When you’re ready to start investing, place an order to buy your security.
Monitor your portfolio. Log into your account to track your securities.
What stocks are in the financial sector?
The list below shows some of the financial stocks Canadian investors can buy into on either Canadian or US exchanges. If you’re interested in a specific company, take some time to carefully research it — including its history and financials — before you buy in.
Canadian Imperial Bank of Commerce (TSX: CM-PQ
Canadian Imperial Bank of Commerce (NSYE: CM)
National Bank of Canada (TSX: NA)
Bank of Montreal (TSX: BMO)
Toronto-Dominion Bank (TSX: TD)
Royal Bank of Canada (TSX: RY)
Canadian Western Bank (TSX: CWB)
iA Financial Corporation Inc. (TSX: IAG)
Automotive Finco Corp. (TSXV: AFCC)
Accord Financial Corp. (TSX: ACD)
Sun Life Financial Inc. (TSX: SLF-PC)
Atrium Mortgage Investment Corporation (TSX: AI)
Manulife Financial Corporation (TSX: MFC)
Axion Ventures Inc. (OTC Markets, Pink Sheets: AXNVF)
CO-OPERATORS GEN INS, CL E PRF (TSX: CCS-PC)
Mogo Inc. (TSX: MOGO)
Visa Inc. (NYSE: V)
Mastercard Incorporated (NYSE: MA)
American Express Company (NYSE: AXP)
The Western Union Company (NYSE: WU)
What ETFs track the financial sector?
You can invest in financial ETFs from Canada, but if you’re looking for more options, you can also explore ETFs that trade on stock exchanges in other countries like the NYSE in the US. There are several Canadian-based brokerages that offer access to international exchanges on which financial ETFs trade including Interactive Brokers and Questrade.
Take a look at the following sector-tracking ETFs:
CI First Asset Global Financial Sector ETF (TSX: FSF)
Hamilton Global Financials ETF (TSX: HFG)
Horizons S&P/TSX Capped Financials Index ETF (TSX: HXF)
iShares Canadian Financial Monthly Income ETF Common Class (TSX: FIE)
iShares S&P/TSX Capped Financials Index ETF (TSX: XFN)
The graph below tracks the Financial Select Sector SPDR ETF (XLF) in the US. Tracking ETF performance is one way to measure how a stock sector as a whole is doing.
Why invest in the financial sector?
The financial sector may be an attractive long-term investment because of its potential for higher returns to help you stay ahead of inflation. For example, the S&P 500 Financials Index’s returned 32.1% in 2019, compared to the Federal Reserve’s estimated inflation rate of 2%.
Long-term trends also support growth in the financial sector. When the sector is strong, the economy thrives, which can lead to higher incomes for consumers and bigger profit margins for companies. As people accumulate wealth, they need a way to manage their funds and plan for retirement.
Another attractive characteristic of financial stocks is their high dividend yield. The sector currently has a 4.19% dividend yield, compared to the S&P 500’s modest 1.96%.
What unique risks does the financial sector face?
The financial sector comes with considerable challenges and risks.
Regulation. Government red tape and legislative compliance can be a burden on companies, decreasing profit.
Drastic rise in interest rates. When rates rise, lenders generally make more money on the credit they issue to borrowers. But if the Bank of Canada and other financial institutions raise interest rates before the economy is ready to adjust to the higher cost of borrowing, demand could drop and potentially trigger a recession. A weak economy can be detrimental to financial stocks.
Litigation. Businesses in the financial sector spend a lot on legal proceedings, which can impact profitability and share prices.
Weakening economy. Financial stocks are extremely sensitive to changes in the economy.
Debt liability. Many financial stocks come with some credit exposure risk. During an economic downturn, borrowers may default on their credit cards and loans, leaving some lenders with a mountain of debt.
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The financial sector may be a good choice as a long-term investment in a healthy economy because of its generous dividends and long-term growth potential. But keep in mind that it’s one of the most volatile sectors of the stock market and comes with inherent risks.
REITs are not included in the financial sector. REITs left the category in 2016 to form its new, separate sector of the stock market. Learn more about real estate investment in our detailed guide.
Financial stocks are cyclical — their performance is generally tied to the health of the economy, which makes them vulnerable to the ups and downs of the business cycle.
Low-interest rates attract more borrowers, which can lead to more capital projects, investments and more economic growth. Higher interest rates translate to more banking profit but may discourage spending.
Image from Getty Images
Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades.
Kimberly Ellis is a personal finance writer at Finder, specializing in banking and financial literacy. After teaching in public and private schools, Kimberly zeroed in on personal financial education to help families and kids develop lifelong money skills. She hails from New York City, graduating summa cum laude from Queens College with a BA in elementary education and mathematics, as well as a New York State teaching certificate. She’s also an aspiring polyglot, always in a book and forever on the hunt for the perfect classic red lipstick. See full bio
Kimberly's expertise
Kimberly has written 10 Finder guides across topics including:
Stacie Hurst is an editor at Finder, specializing in loans, banking, investing and money transfers. She has a Bachelor of Arts in Psychology and Writing, and she has completed FP Canada Institute's Financial Management Course. Before working in the publishing industry, Stacie completed one year of law school in the United States. When not working, she can usually be found watching K-dramas or playing games with her friends and family. See full bio
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