Investors Are Flocking to This ETF. It Could Outperform the S&P 500 for Years.

If you look at the top of the list of exchange-traded funds (ETFs) with the most recent net inflows of investor capital, some of the names aren't likely to surprise you. For example, the Vanguard Total Stock Market ETF, which is the largest ETF in the entire market, is seeing strong inflows right now, as is the Vanguard Total Bond Market ETF, a very popular choice for investors' fixed-income allocations.

However, there is one sector ETF that has seen greater inflows than either of these recently. It is State Street's Financial Select Sector SPDR ETF (NYSEMKT: XLF), which is designed to track bank stocks, insurance companies, and other financial services companies. Let's take a closer look at this ETF and why investors might be optimistic right now.

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The Financial Select Sector SPDR

As the name suggests, the Financial Select Sector SPDR ETF is an index fund that tracks the financial sector, which includes banks, insurance companies, and other financial institutions.

More specifically, the ETF tracks a weighted index and owns 76 stocks, most of which are large-cap financial companies. The largest holding is Berkshire Hathaway -- which is technically an insurance company at its core -- followed by JPMorgan Chase, Visa, Mastercard, and Bank of America. It is a rather top-heavy index, with the top 10 holdings accounting for 55% of the assets.

The ETF has a low cost structure, with a 0.08% expense ratio. This means that for every $10,000 in fund assets, your annual investment costs will be just $8. (Note: This isn't a fee you have to pay, but it will be reflected in the performance over time.)

Why are investors putting money into the financial sector?

For one thing, investors may perceive a bargain opportunity here. Not only did some of the largest banks fall after earnings, but the sector as a whole has been under pressure amid President Donald Trump's stated desire to cap credit card interest rates at 10%.

Additionally, bank interest margins have been improving and could continue to do so in 2026. The Federal Reserve's interest rate cuts have steepened the yield curve (meaning that shorter-term rates have fallen faster than longer-term rates). This is a strong catalyst for net interest margin expansion at banks, and if the Fed cuts rates a few times in 2026, it could boost bank profits.

Finally, we're also seeing signs that merger and acquisition (M&A) and initial public offering (IPO) activity are set for a strong year in 2026, with several massive private companies like OpenAI and SpaceX planning to go public, which should result in strong investment banking fee revenue.

JPMorgan Chase is an advertising partner of Motley Fool Money. Bank of America is an advertising partner of Motley Fool Money. Matt Frankel, CFP has positions in Bank of America and Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway, JPMorgan Chase, Mastercard, Vanguard Total Bond Market ETF, Vanguard Total Stock Market ETF, and Visa. The Motley Fool has a disclosure policy.