Berkshire Hathaway Holds Bank of America, American Express, Visa and Mastercard Stock, but also this Vanguard Low Cost ETF.

Warren Buffett led Berkshire Hathaway (BRK.A -0.99%) (BRK.B -1.18%) reached a new milestone in August, surpassing $1 trillion in market capitalization for the first time.

Although Berkshire is known for its public equity investments in companies such as Apple and Coca-Colathe 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 capitalization for Berkshire as a whole.

Berkshire has a wealth of property and casualty insurance segments, ownership of BNSF Railway, 92% ownership of Berkshire Hathaway Energy, manufacturing, service and sales businesses, and more. It also invested a combined $79.41 billion Bank of America (BAC -2.81%), American Express (AXP -3.09%), Visa (V 0.27%)and MasterCard (MA -0.26%).

While you can buy Berkshire Hathaway shares to gain exposure to these top companies and Berkshire’s private equity holdings, a simpler and perhaps more effective way to invest in the financial sector is through an exchange-traded fund (ETF) such as the ETF. Vanguard Financials ETF (VFH -1.58%). In fact, Berkshire Hathaway’s stock is the fund’s second largest holding with a weighting of 8.1%.

Here’s why financials are one of the most diversified and value-oriented sectors of the market and why the Vanguard Financials ETF might be worth buying now.

Image source: Getty Images.

Knowledge of the financial sector

The financial sector is the second most valuable sector behind technology – making up 13.3% of the sector S&P 500. It includes a wide range of industries, from large banks to regional banks, investment banking, insurance providers, payment processors, financial exchanges and more.

Although the financial sector in general benefits from economic growth, not every part of it reacts to economic factors in the same way. For example, banks can take advantage of 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. Therefore, they prefer lower interest rates and higher spending rates.

Similarly, investment banks and venture capital firms may prefer lower capital costs to stimulate 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 good land valuations and pay growing dividends. In contrast, companies that grow faster may pay small dividends (or none at all) and focus more on reinvesting in the business.

Diversification is particularly important in the financial sector. For example, many regional banks will fail at the beginning of 2023. Having diversification throughout the industry and not just a niche can help protect against a crisis. But too much investment in banks or insurance companies would have led investors to miss the credit card companies’ boom.

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 capitalization of American Express, Visa and Mastercard nearly matches the combined value of the three largest US banks by market capitalization — JPMorgan ChaseBank of America, and Wells Fargo — illustrates the importance of payment processors for the financial sector.

A balanced sector with many opportunities

The Vanguard Financials ETF is a simple, low-cost way to unlock diversification and invest in a mix of growth, income and value. The ETF has an expense ratio of just 0.1%, or just $0.10 per $100 invested. And with a minimum investment amount of just $1, it’s easy to dip your toes into ETFs without allocating a large portion of your portfolio.

Thanks to the price valuations of many large financial companies, the ETF has a price-to-earnings (P/E) ratio of 16.3 and a yield of 1.8% – which is especially impressive considering that the fund is in 20% year-to-date growth. .

The following table shows that the fund’s top 10 holdings include a variety of leading companies from different segments of the financial industry.

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 leading financial stocks. It is a useful tool to get basic exposure to different companies.

Some investors may look to combine ETFs with individual stocks if they want extra exposure to particular companies. For example, if you are more confident in the growth potential of payment processors, 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.