A Tale of Two Financial ETFs: How Vanguard Financials ETF (VFH) and First Trust Nasdaq Bank ETF (FTXO) Compare

Vanguard Financials ETF (NYSEMKT:VFH) provides broad, low-cost exposure to the entire financial sector, while First Trust Nasdaq Bank ETF (NASDAQ:FTXO) offers a more concentrated, more expensive play on U.S. banks.

Selecting between these two depends on whether an investor seeks broad industry representation or a targeted bet on the banking sub-sector. The Vanguard fund follows a traditional cap-weighted approach, while the First Trust fund utilizes a smart-beta methodology focused on liquidity and value factors.

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-yr return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield.

Cost is a major differentiator here, as the Vanguard fund is far more affordable with an expense ratio of 0.09%. The First Trust fund charges 0.6% in fees, though it currently offers a slightly higher payout to investors.

Performance & risk comparison

What's inside

Vanguard Financials ETF holds 404 securities, covering banks, insurance companies, and investment firms. Its largest positions include JPMorgan Chase & Co. (NYSE:JPM) at 10.44%, Berkshire Hathaway Inc. (NYSE:BRKB) at 7.84%, and Mastercard Inc. (NYSE:MA) at 5.27%. The fund was launched in 2004. Vanguard Financials ETF has paid $2.35 per share over the trailing 12 months, which, on its recent ~$132.1 share price, works out to a 1.8% yield.

First Trust Nasdaq Bank ETF is significantly more concentrated, with 50 holdings, and focuses exclusively on the banking sub-sector. Its largest positions include Citigroup Inc. (NYSE:C) at 8.27%, U.S. Bancorp (NYSE:USB) at 7.92%, and JPMorgan Chase & Co. at 7.84%. The fund was launched in 2016. First Trust Nasdaq Bank ETF has paid $0.77 per share over the trailing 12 months, which, on its recent ~$39.3 share price, works out to a 2% yield.

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Which looks like the better buy

To compare the Vanguard Financials ETF (VFH) and First Trust Nasdaq Bank ETF (FTXO), investors should consider several key details. Let's see what they tell us about each fund.

First, we should discuss how the strategies for these funds differ. VFH's primary focus includes the broad financial sector, including banks, insurers, and payment processors. FTXO, on the other hand, holds only U.S. banking stocks. This gives each fund a unique flavor, making FTXO more concentrated and potentially more exposed during periods of banking volatility, while VFH's diversity also exposes it to risks outside of the banking sub-sector.

Two other important factors are historical performance and income potential. Since 2021, VFH has won the head-to-head matchup. VFH has generated a total return of 52%, equating to a compound annual growth rate (CAGR) of 8.7%. FTXO, by contrast, has delivered a total return of 29%, with a CAGR of 5.2%. Both funds have underperformed relative to the S&P 500 over this period. As for income potential, FTXO has a slight advantage. It offers a dividend yield of 2%, while VFH's is 1.8%.

One final factor to weigh is cost. FTXO has an expense ratio of 0.60%, which places it on the higher end of many ETF offerings. It means that someone who invests $10,000 in FTXO should expect to pay $60 in annual fees. VFH, meanwhile, has a much lower expense ratio of 0.09%, giving it an edge in this category.

In summary, although VFH and FTXO are both financial ETFs, several key differences emerge between these two funds. VFH has the edge on both historical performance and fees, while FTXO can claim an advantage on income potential. At any rate, VFH may be favored by investors seeking exposure to the broader financial sector, while FTXO could appeal to those interested only in the banking subsector. Overall, I would suspect that many investors will elect VFH, given its combination of lower fees, broad diversification, and historical performance.

JPMorgan Chase is an advertising partner of Motley Fool Money. Citigroup is an advertising partner of Motley Fool Money. Jake Lerch has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, JPMorgan Chase, Mastercard, and U.S. Bancorp. The Motley Fool has a disclosure policy.