Is a Financial Sector ETF a Better Buy Than Picking the Stocks Yourself?

Exchange-traded funds (ETFs) help risk-averse investors tap into sector-specific opportunities without the risks associated with owning individual stocks. One of those is financials, which typically includes everything from banks to insurance companies.

One of the most well-known ETFs in the financials sector is the State Street Financial Select Sector SPDR ETF (NYSEMKT: XLF). XLF seeks to mimic the performance of the Financial Select Sector Index, which aims to represent the financial sector of the S&P 500. But whether owning that ETF is better than an investor picking stocks on their own depends on a few factors.

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Working with a budget

One of the benefits of owning an ETF is that it can often trade at a fraction of the price of its holdings. For example, JPMorgan Chase and Berkshire Hathaway are the top holdings of XLF. As of this writing, JPMorgan Chase trades for about $360 per share, while the Class B shares of Berkshire Hathaway trade for about $500. In comparison, XLF trades for around $58 per share.

The ETF offers exposure to both JPMorgan and Berkshire, but investors don't have to shell out over $800 to buy shares of both. Instead, an investor could buy XLF for around $60 and still participate in the upside of both companies.

Diversifying for less risk

By holding multiple companies, the risk associated with an ETF is spread out, so a single stock can't impact its overall performance.

Owning individual stocks can indeed offer greater price appreciation, but it also comes with more risk because performance depends entirely on a single stock. For example, the Berkshire Hathaway stock price is roughly flat for the year. In comparison, XLF is up 6% year to date.

Not worrying about portfolio management

One of the biggest benefits of ETFs is not having to manage the portfolio. Instead of tracking positions, looking for new opportunities, and deciding when to rebalance, the ETF essentially does all of that for an investor.

When buying an individual stock is more ideal

Buying an individual stock can be more ideal for investors comfortable with the risk and reward aspect of owning a single stock.

Long-term investors are likely to experience more volatility and will have to deal with price drops at some point than those who own an ETF. But they believe the potential reward for that investment justifies taking on the risk. Also, buying an individual stock is better suited to an investor willing to study a company's ins and outs.

JPMorgan Chase is an advertising partner of Motley Fool Money. Jack Delaney has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and JPMorgan Chase. The Motley Fool has a disclosure policy.