EUFN vs KRE: European Banks vs. U.S. Regional Banks -- Which Financial Sector ETF Is the Better Buy?

The iShares MSCI Europe Financials ETF (NASDAQ:EUFN) provides broad exposure to European financial institutions, whereas the State Street SPDR S&P Regional Banking ETF (NYSEMKT:KRE) focuses strictly on U.S. regional banks.

These funds offer distinct approaches to the financial sector. The State Street fund targets a domestic niche that's sensitive to U.S. interest rate cycles and regional economic health, while the iShares fund diversifies across developed European markets -- giving investors access to global investment banks, diversified financials, and insurance companies operating under different regulatory and economic regimes.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; beta is calculated from monthly returns over the available fund history (up to five years). The 1-year return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield.

KRE is the cheaper option, carrying a 0.35% expense ratio, compared with EUFN's 0.49%. However, EUFN offers a significantly higher dividend yield of 3.97% versus 2.10% for KRE -- which may appeal to income-focused investors.

Performance & risk comparison

KRE's 52.7% maximum drawdown over the past five years reflects the volatility that swept through the U.S. regional banking sector following a series of bank failures in 2023, a stretch that tested investor patience even as many individual names have since recovered. EUFN, by contrast, was more insulated from that specific shock, since its largest holdings are diversified, well-capitalized European banks and insurers rather than smaller regional lenders. That relative stability -- combined with a higher yield -- has helped EUFN post stronger five-year returns.

What's inside

Launched in 2010, EUFN runs a relatively concentrated portfolio with 84 developed-market European companies. Its largest positions include HSBC Holdings (LSE:HSBA) at 9.9%, Banco Santander (NYSE:SAN) at 5.5%, and Allianz (OTC:ALIZY) at 5.1%. These top holdings represent a significant portion of the fund's assets under management, reflecting its focus on major European financial hubs.

KRE, by contrast, uses a representative sampling technique to track the S&P Regional Banks Select Industry Index. The fund currently includes 159 U.S. regional banks. This larger pool of holdings is more equally weighted than EUFN's -- KRE's largest positions include Cullen/Frost Bankers (NYSE:CFR) at 1.4%, Pinnacle Financial Partners (NYSE:PNFP) at 1.4%, and Home BancShares (NYSE:HOMB) at 1.4%. KRE was launched in 2006.

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Which looks like the better buy

The choice between EUFN and KRE really comes down to what kind of financial-sector exposure -- and, more importantly, what kind of risk -- investors are comfortable taking on.

EUFN's tilt toward large, diversified European institutions has historically made it the steadier of the two, and its 3.97% yield gives it a meaningful edge over KRE's 2.10% for income-focused investors. On the other hand, EUFN carries a higher expense ratio than KRE, and the fund's fortunes are tied to European economic growth, currency swings, and regulatory decisions that U.S. investors don't always track closely.

KRE is a direct bet on the health of the U.S. regional banking system -- a group that's historically more sensitive to interest rate moves, credit cycles, and localized economic stress than diversified financial giants. Its roughly 53% maximum drawdown over the past five years is a reminder that regional banks can see outsized swings when confidence in the sector wavers, as it did during 2023's regional banking turmoil. That volatility can cut both ways -- KRE also tends to rally hard when rate-cut expectations build or credit fears ease, so investors who believe the worst is behind U.S. regional banks may see more upside here than in EUFN's steadier, income-oriented profile.

Neither fund replaces the need for a diversified portfolio, but each offers a distinct way to gain targeted exposure to financials -- one favoring income and stability, the other offering higher risk and potentially higher reward tied to a continued U.S. financial sector recovery.

It's also worth remembering that both of these are sector-specific bets. Investors -- especially those just getting started or who want to simplify their exposure to financials -- might be better served by a broad market index fund, which spreads risk across financials and every other major sector at once.

HSBC Holdings is an advertising partner of Motley Fool Money. Andy Gould has no position in any of the stocks mentioned. The Motley Fool recommends HSBC Holdings. The Motley Fool has a disclosure policy.