Financial Sector ETFs: Choosing Between XLF and VFH

When it comes to financial sector exchange-traded funds (ETFs), investors often turn to either the State Street Financial Select Sector SPDR ETF (XLF) or the Vanguard Financials ETF (VFH). While both hold major banks, insurers, and payment networks, they differ in portfolio depth and concentration.

According to a comparison of the two funds, XLF holds significantly fewer stocks than VFH, with 76 holdings compared to VFH's 428. However, XLF is more concentrated in its top positions, with JPMorgan Chase (JPM) holding 11.7% and Berkshire Hathaway (BRKB) also holding 11.7%. In contrast, VFH has a broader exposure to the financial sector and charges a slightly higher expense ratio than XLF.

Despite these differences, both funds have delivered similar total returns over the last five years. However, VFH offers more exposure to smaller regional banks, which could benefit from a steeper yield curve and the current regulatory environment that has encouraged bank dealmaking. On the other hand, XLF is a more concentrated bet on the sector's megacaps.

The bottom line is that investors who want the full sweep of American finance, including smaller regional banks, should choose VFH, while those content to let a handful of megacap names do the heavy lifting may prefer XLF. A $1-a-year difference in fees between the two funds is unlikely to be a deciding factor.