Which Financial ETF Is the Better Investment?

The Vanguard Financials ETF (NYSEMKT:VFH) and Fidelity MSCI Financials Index ETF (NYSEMKT:FNCL) provide nearly identical sector exposure, though Vanguard's significantly larger fund size may appeal to high-volume traders.

Investors seeking to capitalize on the financial sector's core components -- commercial banking, insurance, and capital markets -- frequently weigh these two prominent options. Both funds provide diversified exposure to a broad range of large-cap and mid-cap financial companies, but their underlying index strategies and history of liquidity provide different advantages for long-term holders compared to active traders.

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 Fidelity fund offers a slightly lower cost of entry with an expense ratio of 0.08%, while the Vanguard fund charges 0.09%. Although this difference is just 0.01 percentage points, the Vanguard fund provides a marginally higher trailing dividend payout.

Performance & risk comparison

What's inside

The Vanguard Financials ETF (NYSEMKT:VFH) provides exposure to 428 holdings, with a heavy concentration in financial services. Its largest positions include JPMorgan Chase (NYSE:JPM) at 9.52%, Berkshire Hathaway (NYSE:BRK-B) at 8.14%, and Mastercard (NYSE:MA) at 4.92%. The fund tracks the returns of equities within the financial services industry using a passive management approach. It was launched in 2004. Vanguard Financials ETF has paid $2.32 per share over the trailing 12 months, which on its recent ~$138.45 share price works out to a 1.70% yield.

The Fidelity MSCI Financials Index ETF (NYSEMKT:FNCL) holds 389 stocks and mirrors the same heavy weight in financial services. Its largest holdings include JPMorgan Chase (NYSE:JPM) at 10.30%, Berkshire Hathaway (NYSE:BRK-B) at 7.65%, and Visa (NYSE:V) at 6.70%. This fund aims to replicate the investment results of the MSCI USA IMI Financials 25/50 Index, offering a diversified approach to the domestic financial market. It was launched in 2013. Fidelity MSCI Financials Index ETF has paid $1.26 per share over the trailing 12 months, which on its recent ~$80.60 share price works out to a 1.60% yield.

For more guidance on ETF investing, check out the full guide at this link.

What this means for investors?

These are two very similar ETFs that invest entirely in the financial services sector. While they invest in the same broad MSCI USA IMI Financials index, the Vanguard offering deploys the 25/50 rule which puts in place certain caps to make sure that any single stock isn’t too large or the portfolio isn’t too top heavy.

Also, the Vanguard ETF has a slightly better distribution yield of 1.62% compared to 1.47% for the Fidelity fund. However, the Fidelity fund has a slightly lower expense ratio at 0.08% compared to 0.09% for the Vanguard ETF.

The Vanguard ETF holds slightly more stocks, about 428, while the Fidelity ETF holds about 389 stocks. The top five holdings are virtually the same, although the Vanguard ETF is slightly less top heavy.

Because these portfolios are so similar and invest in the same broad index, the returns are virtually the same over all periods. The Vanguard ETF is bigger with more assets so that may give it certain liquidity advantages. But overall, you can’t go wrong with either one. If you had to pick one, perhaps the Fidelity fund because of its slightly lower expense ratio.

Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.