The financial sector has been one of Wall Street’s steadier stories in 2025, with the Financial Select Sector SPDR (XLF) up roughly 10% year to date as of Nov. 5. That gain reflects a mix of cyclical tailwinds, notably higher net interest income after the multi-year rise in benchmark interest rates, and structural shifts that have left investors more confident in bank profitability and capital returns.

XLF’s composition, a roughly two-thirds concentration in banks, capital markets and financial services, means that its growth has been driven primarily by large banks and brokerages that have benefited from wider lending spreads, stronger trading volumes and renewed appetite for credit. At the same time, insurers and consumer finance names have gradually recovered as credit performance stabilized and markets priced in less acute macro risk.

Policy and regulatory developments have amplified those market forces. This year’s deregulatory moves and proposals to ease certain capital constraints in the United States promised to free up lending capacity and boost return-on-equity expectations for big banks. That optimism, however, has drawn scrutiny from global regulators.

Market positioning has also been sensitive to evolving Fed expectations. Through much of the year, investors moved between betting on imminent rate cuts and pricing in a later easing cycle. Banks, for example, enjoyed strong net interest income while rate-cut hopes supported broader risk appetite and capital markets activity.

Looking ahead, the sector’s momentum is likely to persist only if loan growth holds up, credit losses remain benign and regulatory changes prove sustainable. If policy loosening continues and the macro backdrop stays supportive, banks could extend gains through better capital returns and M&A financing activity. Conversely, a deterioration in economic data, a sudden reversal in interest-rate expectations, or renewed regulatory tightening would quickly temper valuations. In short, 2025 has restored confidence to financials, but the coming months will test whether that confidence is durable.

For now, confidence remains intact. The sector’s consistent performance highlights market conviction that U.S. banks are entering this new phase of monetary policy from a position of strength. For these reasons, financial mutual funds might provide much-needed stability in the current environment. Hence, astute investors should consider such funds at present. Mutual funds, in general, reduce transaction costs and diversify portfolios without an array of commission charges that are primarily associated with stock purchases (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).

We have thus selected three financial mutual funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy), have positive three-year and five-year annualized returns and minimum initial investments within $5000, as well as carry a low expense ratio.

Davis Financial (RPFGX Quick QuoteRPFGX - Free Report) follows the Davis Investment Discipline, allocating the majority of its net assets, plus borrowings, to securities of companies mainly in financial services. It primarily invests in common stocks, including depositary receipts, targeting firms with at least half their assets or revenues tied to financial services.

Christopher Cullom Davis has been the lead manager of RPFGX since January 2014. Three top holdings for RPFGX are 12.2% in Capital One, 9.5% in Wells Fargo and 8.1% in JPMorgan Chase.

RPFGX’s 3-year and 5-year annualized returns are 27.3% and 22.2%, respectively. Its net expense ratio is 0.94%. RPFGX has a Zacks Mutual Fund Rank #1. To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.

T. Rowe Price Financial Services (PRISX Quick QuotePRISX - Free Report) typically commits the majority of its net assets, plus borrowings, to common stocks of financial services companies. Derivatives offering exposure to the fund’s stated investment focus, or to related market risk factors, are included when determining compliance with the fund’s investment policy.

Gregory Locraft has been the lead manager of PRISX since September 2024. Three top holdings for PRISX are 5.2% in Bank of America, 4.2% in JPMorgan and 4.2% in Charles Schwab.

PRISX’s 3-year and 5-year annualized returns are 24.3% and 22.5%, respectively. Its net expense ratio is 0.83%. PRISX has a Zacks Mutual Fund Rank #2.

Fidelity Advisor Financials (FIKBX Quick QuoteFIKBX - Free Report) focuses on common stocks of financial service companies, both domestic and international, using fundamental analysis of financial health, industry standing and broader market conditions to choose investments and maintain significant exposure to the financial sector.

Matt Reed has been the lead manager of FIKBX since June 2019. Three top holdings for FIKBX are 10.2% in Mastercard, 6.5% in Wells Fargo and 5.5% in Bank of America.

FIKBX’s 3-year and 5-year annualized returns are 22.9% and 21.9%, respectively. Its net expense ratio is 0.59%. FIKBX has a Zacks Mutual Fund Rank #2.

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