Berkshire Hathaway owns shares of Bank of America, American Express, Visa and Mastercard, but so does this low-cost Vanguard ETF

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

Although Berkshire is known for its public 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 a market cap of $1.026 trillion 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 retail businesses, and more. It also has a total of $79.41 billion invested Bank of America (BAC -2.81%), American Express (AXP -3.09%), Visa (V 0.27%)and MasterCard (ME -0.26%).

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

Here’s why the financial sector is 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 after technology — accounting for 13.3% of the S&P 500. It includes a diverse range of industries from large 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 from 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 stimulate M&A activity. However, an insurance company depends more on regulations than economic conditions.

Low-growth heavy pockets of the financial sector tend to have very cheap valuations and pay growing dividends. Conversely, faster-growing companies may pay little (or no) dividends and focus more on reinvesting in the business.

Diversification is particularly important in the financial sector. For example, several regional banks failed in early 2023. Diversifying into the industry and not just a niche can help protect against a crisis. But investing too much in banks or insurance companies would have caused investors to miss out on the boom in credit card companies.

One of Berkshire’s best long-term gainers has been American Express — which is now its second-most valuable position behind 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 — illustrating the importance of payment processors to 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 stocks. The ETF has an expense ratio of just 0.1%, or just $0.10 per $100 invested. And with a minimum investment of just $1, it’s easy to dip your toes into ETFs without allocating a large portion of your portfolio.

Thanks to the cheap valuations of so 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 given that the fund has grown 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.

Data source: Vanguard.

Combined, the top 10 holdings represent 42% of the fund, which represents balance and diversification.

Let the Vanguard Financial Sector ETF work for you

The Vanguard Financial Sector ETF is an inexpensive way to invest in Berkshire Hathaway and other top financial stocks. It is a useful tool to get basic exposure to different companies.

Some investors may look to pair the ETF with individual stocks if they want additional exposure to certain companies. For example, if you are more confident in the growth potential of payment processors, then we recommend buying Visa, Mastercard and American Express to increase your exposure beyond what the ETF offers.

The Vanguard Financial Sector ETF is worth a closer look for investors looking to inject new capital into the market without chasing top companies with soaring valuations.