IYF vs. KRE: Which Financial Sector ETF Is the Better Buy?

Comparing the iShares U.S. Financials ETF (NYSEMKT:IYF) to the SPDR S&P Regional Banking ETF (NYSEMKT:KRE) highlights a classic trade-off: broad-sector stability versus highly concentrated industry volatility.

Both funds offer exposure to financial companies, but they serve different roles in a portfolio. While IYF provides a diversified look at the entire U.S. financial sector, KRE zeroes in on regional banks, making it more sensitive to specific industry shifts and interest rate environments.

Snapshot (cost & size)

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

KRE is slightly cheaper, carrying a 0.35% expense ratio compared to IYF’s 0.38%. Investors seeking income may also prefer KRE's higher 2.26% dividend yield vs. IYF’s 1.55%.

Performance & risk comparison

What's inside

Launched in 2000, IYF tracks 142 holdings. Its largest positions include Berkshire Hathaway (NYSE:BRKB) at 11.1%, JPMorgan Chase (NYSE:JPM) at 10.5%, and Bank of America (NYSE:BAC) at 4.6%. IYF’s broader structure provides access to the diversified financial giants that anchor the American economy.

Launched in 2006, KRE holds 161 companies and tracks the S&P Regional Banks Select Industry Index. Top holdings include Popular (NASDAQ:BPOP) at 1.6%, East West Bancorp (NASDAQ:EWBC) at 1.6%, and Zions Bancorp (NASDAQ:ZION) at 1.6%. Unlike IYF, KRE uses a modified equal-weighted approach to prevent any single regional bank from dominating the portfolio.

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What this means for investors

The choice between IYF and KRE comes down to how much volatility you're willing to accept in exchange for more targeted exposure -- and how much of a role interest rates play in your investing outlook.

Regional banks, the backbone of KRE's portfolio, tend to be more sensitive to interest-rate swings than the large, diversified financial institutions that anchor IYF. When rates rise, regional banks can initially benefit from wider net interest margins -- the spread between what they earn on loans and what they pay on deposits. But sustained high rates can also dampen loan demand and raise credit risk, particularly for smaller institutions with less diversified revenue streams. The regional banking sector also faced a specific stress test in 2023, when a handful of high-profile bank failures rattled confidence in the space and sent KRE sharply lower before it recovered.

IYF's megabank-heavy makeup -- with JPMorgan and Berkshire Hathaway alone accounting for more than 20% of the portfolio -- provides a meaningful buffer in rough markets. These types of institutions tend to have diversified revenue streams spanning investment banking, wealth management, and insurance, which help cushion sector-specific shocks.

For income-oriented investors, KRE's higher dividend yield may be appealing, but it's worth remembering that yield alone doesn't tell the full story. IYF's stronger historical total return figures suggest it has delivered greater value overall, even if its dividend payout is lower. Investors choosing between these two funds would do well to consider their broader portfolio, their time horizon, and -- perhaps most importantly -- where they believe interest rates are headed.

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