Better iShares Financial Sector ETF: EUFN's Europe Focus or IAT's U.S. Regional Banks

The iShares MSCI Europe Financials ETF (NASDAQ:EUFN) provides broad exposure to European banks and insurers with a higher yield, while the iShares U.S. Regional Banks ETF (NYSEMKT:IAT) focuses exclusively on domestic regional lenders.

While both funds are issued by iShares and focus on financials, they serve different strategic roles in a portfolio. One provides a focused play on the domestic banking sector's sensitivity to U.S. interest rates and economic health, while the other offers a diversified entry point into the massive financial institutions across the Atlantic.

Snapshot (cost & size)

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

The iShares MSCI Europe Financials ETF has a higher expense ratio at 0.49% compared to 0.38% for the iShares U.S. Regional Banks ETF. The European-focused fund offers a significantly higher dividend yield of 4.30%, while the domestic fund provides a yield of 2.60%.

Performance & risk comparison

What's inside

The iShares MSCI Europe Financials ETF concentrates 98% of its assets in the financial services sector, with small allocations to technology. It holds 84 positions in total, providing broad exposure to developed European markets. Its largest positions include HSBC Holdings at 9.49%, Banco Santander at 5.71%, and Allianz at 5.20%. It was launched in 2010. The iShares MSCI Europe Financials ETF has paid $1.65 per share over the trailing 12 months, which on its recent ~$38.99 share price works out to a 4.30% yield.

The iShares U.S. Regional Banks ETF focuses 100% of its assets in the financial services sector, specifically targeting the U.S. regional banking industry. It holds 31 positions in total, offering a more focused domestic portfolio. Its largest positions include PNC Financial Services Group at 14.91%, US Bancorp at 14.32%, and Truist Financial at 9.48%. It was launched in 2006. The iShares U.S. Regional Banks ETF has paid $1.62 per share over the trailing 12 months, which on its recent ~$62.21 share price works out to a 2.60% yield.

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What this means for investors

Wall Street appears to be rotating out of tech stocks and into the financial sector in recent weeks as the potential for a Federal Reserve interest rate hike and resilient economic data have boosted favorable net interest margins. Amidst this environment, two iShares funds provide an efficient way to gain exposure to the financial markets, the iShares MSCI Europe Financials ETF (EUFN) and iShares U.S. Regional Banks ETF (IAT). These funds offer very different strategies, so deciding which to invest in depends on the approach that aligns best with your investment objectives.

EUFN is for investors who want exposure to the European financial market. The fund includes large companies such as HSBC, and offers greater diversification through its 84 holdings as opposed to IAT’s much smaller universe of 31 stocks. EUFN also boasts a larger AUM, and this greater liquidity results in tighter bid-ask spreads, saving you money on every transaction. It sports a superior dividend yield, but that is offset to a degree by its higher expense ratio.

IAT provides exposure to “main street USA.” Its regional banks focus means you’re investing in local economies in the U.S., making the fund ideal for those who want to target the U.S. over Europe. The smaller institutions in IAT have the potential to outperform larger companies, but also harbor greater volatility.

HSBC Holdings is an advertising partner of Motley Fool Money. Robert Izquierdo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Truist Financial and U.S. Bancorp. The Motley Fool recommends HSBC Holdings. The Motley Fool has a disclosure policy.