Is Vanguard Financials or State Street Bank the Superior ETF for Your Evolving Portfolio?

Investors choosing between State Street SPDR S&P Bank ETF (NYSEMKT:KBE) and Vanguard Financials ETF (NYSEMKT:VFH) are weighing a narrow, equal-weighted focus on banks against a broad, market-cap-weighted financial sector strategy.

Both funds provide targeted exposure to financial companies, but their scopes and costs differ significantly. KBE targets the banking sub-sector specifically, including regional and diversified institutions. VFH offers a wider net, capturing insurance, investment banking, and payment processors alongside traditional banks, with $13.9 billion in assets under management (AUM).

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 as of the close of trading on July 27.

The Vanguard financials fund is the more affordable option, with an expense ratio of 0.09% that is significantly lower than its peer. While the SPDR bank fund provides a slightly higher trailing 12-month payout, its higher 0.35% fee could weigh more heavily on long-term performance.

Performance & risk comparison

What's inside

Vanguard Financials ETF provides broad exposure to the financial services industry, with approximately 97% of the portfolio in that sector and minor tilts toward real estate and technology. It uses a passive management approach to track its reference index, holding 427 positions. Its largest positions include JPMorgan Chase & Co (NYSE:JPM) at 9.2%, Berkshire Hathaway Inc (NYSE:BRKB) at 7.8%, and Mastercard Inc (NYSE:MA) at 4.7%. Launched in 2004, the Vanguard fund has paid $2.32 per share over the trailing 12 months, which on its recent ~$139.18 share price works out to a 1.7% yield.

State Street SPDR S&P Bank ETF focuses exclusively on the banking sub-industry within financial services and aims to track the S&P Banks Select Industry Index. It maintains 103 holdings and uses a modified equal-weighted approach to ensure exposure across various market capitalizations. Its largest positions include Rocket Companies (NYSE:RKT) at 1.2%, Nicolet Bankshares Inc (NYSE:NIC) at 1.1%, and Bancorp Inc (NASDAQ:TBBK) at 1.1%. Launched in 2005, the SPDR fund has paid $1.47 per share over the trailing 12 months, which on its recent ~$69.22 share price works out to a 2.1% yield.

Which fund is the better buy?

While both of these ETFs provide exposure primarily to U.S. banks, they have some key differences in their construction that may inform investors’ choice of which fund to invest in.

The Vanguard fund, VFH, is a traditional-style ETF that holds equities in its portfolio. The fund is skewed toward large-cap stocks, with 62% of its holdings, followed by 25% of its assets in mid caps, and the balance in small caps.

The Vanguard offering has been a steady performer. It’s up 9.6% the past three months and down less than 1% for the year-to-date. VFH has returned 19.7%, 10%, and 13.1% over the 3-year, 5-year, and 10-year time frames.

KBE, the State Street bank ETF, is much more invested in small caps, which account for 78% of its portfolio, while just 15% is in mid caps and 8% in large caps. That is going to give the fund a much different performance and risk profile from VFH. Indeed, with the best rally in small-cap stocks since 1991 underway, KBE has been the beneficiary. The fund is up 13% year-to-date compared to the slight loss for VFH, and has returned 27.1% over the 3-year time frame. VFH, however, is the better performer over the 5- and 10-year look-backs, since KBE has produced returns of 8.8% and 11.1% over those periods.

Both are good funds for those looking for financials to add to their portfolio. However, VFH’s lower expense ratio, lesser volatility, and better long-term performance suggest it is the better ETF for investors thinking long-term profits.

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

JPMorgan Chase is an advertising partner of Motley Fool Money. Andy Gould has positions in Berkshire Hathaway, Mastercard, and Rocket Companies. The Motley Fool has positions in and recommends Berkshire Hathaway, JPMorgan Chase, Mastercard, Nicolet Bankshares, and Rocket Companies. The Motley Fool has a disclosure policy.