The Bottom Line on Financial ETFs: Weighing VFH’s Efficiency Against IYF’s Large-Cap Edge

Vanguard Financials ETF (NYSEMKT:VFH) provides a low-cost, broadly diversified approach to the financial sector, while iShares U.S. Financials ETF (NYSEMKT:IYF) offers a more concentrated portfolio with a higher internal expense ratio.

Both ETFs track the U.S. financial services industry, offering exposure to major banks, insurance companies, and investment firms. While they have similar objectives, differences in their fee structures, total number of holdings, and specific sector weights may appeal to different types of investors.

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.

The Vanguard Financials ETF is the more affordable option, with a 0.09% expense ratio, considerably lower than the iShares U.S. Financials ETF's 0.37%. The Vanguard fund also currently features a higher dividend yield.

Performance & risk comparison

What's inside

Vanguard Financials ETF maintains a broad portfolio of 404 holdings, focusing almost entirely on financial services (97%) with minor tilts toward technology and real estate. Its largest positions include JPMorgan Chase & Co (NYSE:JPM) at 10.46%, Berkshire Hathaway (NYSE:BRKB) at 8.36%, and Visa (NYSE:V) at 7.10%. It was launched in 2004. Vanguard Financials ETF has paid $2.35 per share over the trailing 12 months, which, on its recent ~$134.3 share price, works out to a 1.8% yield.

The iShares U.S. Financials ETF is more concentrated, holding 143 stocks, with allocations to financial services (48%), banks (32%), and insurance (19%). Its top positions include Berkshire Hathaway at 12.23%, JPMorgan Chase & Co at 11.20%, and Bank of America (NYSE:BAC) at 3.90%. It was launched in 2000. iShares U.S. Financials ETF has paid $1.95 per share over the trailing 12 months, which, on its recent ~$128.6 share price, works out to a 1.5% yield.

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Which looks like the better buy

When comparing the Vanguard Financials ETF (VFH) and the iShares U.S. Financials ETF (IYF), investors should consider several key factors. Let's see what they tell us about each fund.

First, we should examine each fund's strategy. For its part, VFH is a very broad-based fund. It holds more than 400 stocks across large-, mid-, and small-cap sectors. IYF, on the other hand, holds about 150 stocks and is more concentrated among large-cap financial stocks.

Two other important factors are historical performance and income potential. Over the last five years, VFH has generated a total return of 51%, equating to a compound annual growth rate (CAGR) of 8.7%. IYF, meanwhile, has delivered a total return of 59%, with a 9.7% CAGR. As for income, VFH has a dividend yield of 1.8%, while IYF's is 1.5%, granting VFH an edge.

One final factor to weigh is cost. Here, VFH's biggest advantage emerges. VFH has an expense ratio of 0.09%, while IYF's is 0.38%. For context, if a person bought $10,000 of each fund, they should expect to pay $9 in annual fees for their VFH shares but $38 in annual fees for their IYF shares.

In summary, VFH and IYF are both ETFs focused on financial stocks, but there are key differences in the funds' strategies, costs, and income potential. Many investors will favor VFH for its broader diversification, lower costs, and higher dividend yield. However, some investors may still elect IYF given its better historical performance and its focus on large-cap financial stocks.

JPMorgan Chase is an advertising partner of Motley Fool Money. Bank of America is an advertising partner of Motley Fool Money. Jake Lerch has positions in Visa. The Motley Fool has positions in and recommends Berkshire Hathaway, JPMorgan Chase, and Visa. The Motley Fool has a disclosure policy.