VFH Outperforms XLF in Financial Sector Diversification

The State Street Financial Select Sector SPDR ETF (XLF) and Vanguard Financials ETF (VFH) are two popular financial sector exchange-traded funds (ETFs) that investors often choose between. Both funds track a range of financial companies, but they differ in the number of holdings and their top positions.

VFH offers broader exposure to the financial sector with 428 stocks in its portfolio compared to XLF's 76. However, both funds have similar total returns over the last five years, with VFH delivering a 14.26% return compared to XLF's 13.86%. The main difference between the two funds is that XLF is more concentrated in its top positions, holding major banks and payment networks such as JPMorgan Chase (JPM), Berkshire Hathaway (BRKB), and Visa (V) with significant weightings.

VFH, on the other hand, has a longer tail of additional holdings consisting mostly of regional banks, insurers, and fintechs. This wider net means more exposure to smaller, rate-sensitive regional banks that have the most to gain from a steeper yield curve and the current regulatory environment.