VFH vs. EUFN: Should You Cash In on this 4%-Yielding European Financials ETF?

Investors choosing between the Vanguard Financials ETF (NYSEMKT:VFH) and the iShares MSCI Europe Financials ETF (NASDAQ:EUFN) must weigh the significantly lower costs of the Vanguard fund against the higher yield and European geographic focus of the iShares fund.

Both funds provide targeted exposure to the financial services sector, but they operate in different regional contexts. This comparison examines how these two heavyweights differ in terms of regional exposure, underlying concentration, and total ownership costs. While both target the financial sector, their geographical mandates create divergent risk profiles for a diversified portfolio.

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.

The Vanguard fund is the more affordable option, sporting a thin 0.09% expense ratio compared to the 0.49% charged by the iShares fund. Over a decade of investing, the 0.40 percentage point gap in expense ratios could significantly impact total returns, making the Vanguard fund a preferred choice for cost-conscious investors. However, the iShares fund offers a much higher payout for income-seeking investors.

Performance & risk comparison

What's inside

The Vanguard Financials ETF holds 428 positions, providing broad exposure to U.S. banks, insurers, and investment firms. Its largest positions include JPMorgan Chase & Co. at 9.52%, Berkshire Hathaway at 8.14%, and Mastercard at 4.92%. It was launched in 2004. Vanguard Financials ETF has paid $2.32 per share over the trailing 12 months, which on its recent ~$137.35 share price works out to a 1.70% yield.

The iShares MSCI Europe Financials ETF is more concentrated, with around 100 holdings focused on developed European markets. Its portfolio also focuses on companies within the financial services industry, and its largest positions include HSBC at 9.66%, Banco Santander at 5.43%, and Allianz at 5.19%. 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 ~$39.70 share price works out to a 4.10% yield.

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What this means for investors

If you’re interested in investing in the financial sector, you’ll find lots of different ways to play the theme. One way to narrow down your options is by geography. The Vanguard Financials ETF holds a relatively large portfolio of U.S. financial companies, with a concentration in companies that have long been domestic financial powerhouses. As with most investments in the financial sector, these companies are likely to be cyclical, meaning their performance will be tied to the health of the U.S. economy and risks posed by domestic financial regulations. Compared to its international counterpart, investors may appreciate VFH’s lower expense ratio and larger total assets under management, which can provide stability and liquidity.

The iShares MSCI Europe Financials ETF is a way to play the same financial theme with an international twist, focusing on the financial services industry in European markets. It charges a much higher expense ratio, a risk that could compound over decades, and it’s more concentrated, meaning any one of its 100 or so holdings could have a much bigger impact on the overall fund (indeed, EUFN’s max drawdown is much steeper than VFH’s). You’re also dealing with foreign holdings, which can introduce different regulatory risks. But the rewards may be worth it: Its total returns have trounced VFH’s recently and it currently delivers a remarkable 4% dividend yield. For investors looking to diversify their holdings and who are willing to take on the added risk and due diligence of investing in international markets, EUFN could be an attractive choice.

Alternatively, if you’re really looking to up your exposure to financial stocks, consider opening small positions in both ETFs, as there’s very little overlap and plenty of potential for strong long-term returns.

JPMorgan Chase is an advertising partner of Motley Fool Money. HSBC Holdings is an advertising partner of Motley Fool Money. Sarah Sidlow has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway, JPMorgan Chase, and Mastercard. The Motley Fool recommends HSBC Holdings. The Motley Fool has a disclosure policy.