Better U.S. Bank ETF: State Street's KBE vs. First Trust's FTXO

The State Street SPDR S&P Bank ETF (NYSEMKT:KBE) offers a more diversified, lower-cost entry into the banking sector compared to the concentrated and higher-fee First Trust Nasdaq Bank ETF (NASDAQ:FTXO).

Both ETFs target the U.S. financial landscape, yet they take different structural paths for investors seeking exposure to domestic banks. While FTXO focuses on "smart" indexing with fewer positions selected by factor criteria, KBE provides broader exposure across the industry, including regional players and diversified financial services.

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-year return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield.

Investors may find the State Street fund more affordable, as its 0.35% expense ratio is lower than the 0.6% charged by the First Trust fund. Additionally, State Street SPDR S&P Bank ETF offers a higher payout for income-seeking portfolios.

Performance & risk comparison

What's inside

The State Street SPDR S&P Bank ETF focuses 100% on financial services, providing exposure to large, mid, and small-cap companies across the banking landscape. Its largest positions include Central Bancompany (NASDAQ:CBC) at 1.14%, Customers Bancorp (NYSE:CUBI) at 1.03%, and First Citizens BancShares (NASDAQ:FCNCA) at 1.03%. The fund uses a modified equal-weighted approach to ensure the portfolio is not overly concentrated in a few giants. It launched in 2005, and has paid $1.47 per share over the trailing 12 months, which on its recent ~$66.8 share price works out to a 2.2% yield.

First Trust Nasdaq Bank ETF is also 100% concentrated in financial services but maintains a tighter portfolio of 50 positions based on liquidity and fundamental factors. Its largest positions include Wells Fargo (NYSE:WFC) at 8.07%, U.S. Bancorp (NYSE:USB) at 8.02%, and JPMorgan Chase (NYSE:JPM) at 7.81%. This structure creates a more top-heavy profile compared to the State Street fund. It launched in 2016, and has paid $0.77 per share over the trailing 12 months, which on its recent ~$40.2 share price works out to a 1.9% yield.

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

Which looks like the better buy

Investors looking for exposure to the U.S. banking sector have two distinct choices in the State Street SPDR S&P Bank ETF (KBE) and the First Trust Nasdaq Bank ETF (FTXO). Choosing between them depends on whether you want to target a handful of the largest U.S. banks through FTXO or prefer KBE's broader, more regional bank-focused holdings.

Over a five-year time horizon, both funds deliver about the same return. For cost-conscious investors, however, KBE's lower expense ratio and higher dividend yield can be compelling factors.

That said, a key consideration is the current interest rate environment. Major Wall Street banks and economists increasingly expect the Federal Reserve to continue raising interest rates into early 2027.

If that happens, KBE is more likely to outperform in a controlled, moderate rate-hike cycle where overall U.S. economic growth stays steady. That's because of the fund's focus on regional banks, which rely heavily on traditional lending and deposit-taking versus the big banks' greater fee-based businesses. When rates rise, regional banks can reprice loans quickly, and expand their net interest margin.

However, if the Fed is more aggressive with rate hikes, regional banks could suffer as loan volume declines, making FXTO the fund more likely to outperform in this scenario.

JPMorgan Chase is an advertising partner of Motley Fool Money. Wells Fargo is an advertising partner of Motley Fool Money. Robert Izquierdo has positions in JPMorgan Chase and Wells Fargo. The Motley Fool has positions in and recommends JPMorgan Chase and U.S. Bancorp. The Motley Fool has a disclosure policy.