Key Points
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iShares U.S. Financials ETF is significantly larger and more diversified with 141 holdings compared to the bank-concentrated First Trust Nasdaq Bank ETF.
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First Trust Nasdaq Bank ETF has delivered stronger 1-year total return but carries a significantly deeper 5-year maximum drawdown.
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iShares U.S. Financials ETF offers a lower expense ratio of 0.37%, while First Trust Nasdaq Bank ETF charges 0.6%.
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The First Trust Nasdaq Bank ETF (NASDAQ:FTXO) offers targeted exposure to the banking industry, while the iShares U.S. Financials ETF (NYSEMKT:IYF) provides a broader, more diversified play on the entire financials sector at a lower cost.
Financial ETFs often look similar on the surface, but the underlying index methodology can create vast differences in risk and reward. While both funds target American financial institutions, they diverge significantly in their concentration levels, fee structures, and how they handle market volatility.
Snapshot (cost & size)
The iShares U.S. Financials ETF is the more affordable option with a 0.37% expense ratio compared to the 0.6% charged by First Trust Nasdaq Bank ETF. However, the First Trust fund provides a slightly higher payout, with a 1.7% dividend yield versus the 1.4% offered by the iShares fund.
Performance & risk comparison
What's inside
The iShares U.S. Financials ETF provides broad exposure to the domestic financial sector, with 99% of its weight in financial services and a 1% sliver of real estate. It holds 141 positions, and its largest positions include Berkshire Hathaway at 11.6%, JPMorgan Chase & Co. (NYSE:JPM) at 11.3%, and Bank of America at 4.24%. It was launched in 2000. iShares U.S. Financials ETF has paid $1.9 per share over the trailing 12 months, which on its recent ~$134.9 share price works out to a 1.4% yield.
In contrast, the First Trust Nasdaq Bank ETF is much more concentrated, with a specific emphasis on the banking industry. It carries 49 holdings, and its top holdings include Citigroup Inc. at 8.8%, Bank of America Corporation at 8.5%, and JPMorgan Chase & Co. at 8.35%. It was launched in 2016. First Trust Nasdaq Bank ETF has paid $0.7 per share over the trailing 12 months, which on its recent ~$42.0 share price works out to a 1.7% yield.
For more guidance on ETF investing, check out the full guide at this link.
Which looks like the better buy
Financial institutions play a critical role in the economy and can be wise investment options. Large institutions are relatively stable, provide consistent income generation, and benefit from economic expansion. They can even hedge against inflation risk, as rising interest rates can increase their interest margins and profitability.
The choice between FTXO and IYF comes down to how broadly or narrowly you want to follow these financial companies. IYF is a massive fund, with more than 140 positions and $4.3 billion in assets under management. It focuses on a broader swath of the financials sector, and holds banks, mortgage companies, insurance businesses, and more.
FTXO is a bet on banking. It's a smaller fund that has delivered a much more impressive return over the last year, but with much greater volatility and a slightly higher expense ratio. Its focus on banks also allows it to pay slightly more in dividend income than the broader IYF fund.
Investors in this sector should also consider risks such as regulatory changes, economic downturns, and credit risk exposure. For most investors looking to harness the upside potential of the financial sector, IYF is probably the more stable, less risky option.
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Bank of America is an advertising partner of Motley Fool Money. Citigroup is an advertising partner of Motley Fool Money. JPMorgan Chase is an advertising partner of Motley Fool Money. Sarah Sidlow has positions in Bank of America and Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway and JPMorgan Chase. The Motley Fool has a disclosure policy.