Warren Buffett-led Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B) achieved a new milestone in August, surpassing $1 trillion in market cap for the first time.
Although Berkshire is known for its public equity investments in companies like Apple and Coca-Cola, the value of the rest of the business is actually much higher. In fact, Berkshire's holdings in public companies are worth about $320 billion compared to the $1.026 trillion market cap for Berkshire as a whole.
Berkshire has a treasure trove of property and casualty insurance segments, ownership of BNSF Railway, 92% ownership of Berkshire Hathaway Energy, manufacturing, service, and retailing businesses, and more. It also has a combined $79.41 billion invested in Bank of America(NYSE: BAC), American Express(NYSE: AXP), Visa(NYSE: V), and Mastercard (NYSE: MA).
While you could buy Berkshire Hathaway stock to get exposure to these top companies and Berkshire's private holdings, a simpler and perhaps more effective way of investing in the financial sector is through an exchange-traded fund (ETF) like the Vanguard Financials ETF(NYSEMKT: VFH). In fact, Berkshire Hathaway stock is the fund's second-largest holding with an 8.1% weighting.
Here's why financials are one of the market's most diversified and value-orientated sectors and why the Vanguard Financials ETF could be worth buying now.
Image source: Getty Images.
Getting to know the financial sector
The financial sector is the second most valuable sector behind technology -- making up 13.3% of the S&P 500. It includes a diverse array of industries, from big banks to regional banks, investment banking, insurance providers, payment processors, financial exchanges, and more.
Although the financial sector generally benefits from economic growth, not every part of it reacts to economic factors in the same way. For example, banks can benefit from higher interest rates by collecting more interest income from consumers. But credit card companies make money by the number of transactions and the average amount of each transaction. So, they would prefer lower interest rates and higher spending rates.
Similarly, investment banks and venture capital firms may prefer lower capital costs to spur merger and acquisition activity. However, an insurance company depends more on regulations than economic conditions.
Stodgy low-growth pockets of the financial sector tend to have dirt cheap valuations and pay rising dividends. In contrast, faster-growing companies may pay small dividends (or none at all) and focus more on reinvesting in the business.
Diversification is especially important in the financial sector. For example, several regional banks failed in early 2023. Having diversification across the industry and not just one niche can help protect against a crisis. But too much investment in banks or insurance companies would have led investors to miss out on the boom in credit card companies.
One of Berkshire's best long-term winners has been American Express -- which is now its second most valuable position behind only Apple. The combined market cap of American Express, Visa, and Mastercard nearly matches the combined value of the three largest U.S. banks by market cap -- JPMorgan Chase, Bank of America, and Wells Fargo -- illustrating the importance of payment processors to the financial sector.
A balanced sector with plenty of opportunities
The Vanguard Financials ETF is a simple, low-cost way to unlock diversification and invest in a blend of growth, income, and value stocks. The ETF has a mere 0.1% expense ratio, or just $.10 per $100 invested. And with a minimum investment amount of just $1, it's easy to dip your toes in the ETF without allocating a large chunk of your portfolio.
Thanks to the inexpensive valuations of so many large financial companies, the ETF has a 16.3 price-to-earnings (P/E) ratio and a yield of 1.8% -- which is especially impressive considering the fund is up 20% year to date.
The following table shows that the fund's top 10 holdings include a variety of leading companies from different segments of the financial industry.
Company | Weighting in the Vanguard Financials ETF |
|---|---|
JPMorgan Chase | 8.6% |
Berkshire Hathaway | 8.1% |
Mastercard | 5.5% |
Visa | 4.1% |
Bank of America | 4.1% |
Wells Fargo | 3% |
Goldman Sachs | 2.3% |
S&P Global | 2.2% |
American Express | 2.1% |
BlackRock | 1.8% |
Data source: Vanguard.
Combined, the top 10 holdings make up 42% of the fund, which represents balance and diversification.
Let the Vanguard Financial Sector ETF work for you
The Vanguard Financial Sector ETF is a low-cost way to invest in Berkshire Hathaway and other top financial stocks. It's a useful tool for getting baseline exposure to various companies.
Some investors may look to pair the ETF with individual stock holdings if they want extra exposure to particular companies. For example, if you're extra confident in the growth potential of payment processors, then you may want to consider buying Visa, Mastercard, and American Express to increase your exposure beyond what the ETF provides.
The Vanguard Financial Sector ETF is worth a closer look for investors who want to put new capital into the market without chasing high-flying companies with sky-high valuations.
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Bank of America is an advertising partner of The Ascent, a Motley Fool company. Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. American Express is an advertising partner of The Ascent, a Motley Fool company. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Bank of America, Berkshire Hathaway, Goldman Sachs Group, JPMorgan Chase, Mastercard, Microsoft, Nvidia, S&P Global, and Visa. The Motley Fool recommends the following options: long January 2025 $370 calls on Mastercard, long January 2026 $395 calls on Microsoft, short January 2025 $380 calls on Mastercard, and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
