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Financials ETFs Head to Head

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The financial sector is garnering a lot of investor attention lately. With developments in President Donald Trump’s tax reform plan and odds of another rate hike to end this year increasing, financials stocks have been rallying.


Cause for Appeal


Republican leaders unveiled a tax reform plan aimed at reducing taxes for the corporate and also individuals. Although still in its early stages, it has increased investor optimism about hopes of tax cuts and deregulation (read: Treasury ETFs Weaken in the Wake of Tax Talk and Fed Chief Rumors).


Moreover, in its latest September meeting, the Federal Reserve held on to rates. However, it hinted at chances of a rate hike in the December meeting. The current probability of a December rate hike of 25 basis points is 76.7%, per the CME Fed watch tool.


Adding to the rally, the current favorite to lead the Fed, Kevin Warsh, is seen as a friend of the administration who is expected to expedite the process of deregulation and further rate hikes if he assumes the position currently held by Janet Yellen (see all Financials ETFs here).


iShares U.S. Financials ETF (IYF - Free Report)


This fund seeks to provide exposure to financial stocks and tracks the Dow Jones U.S. Financials Index. It has AUM of $1.98 billion and charges a moderate fee of 44 basis points a year. It has 291 holdings and bears significant concentration risk as over 39% of the assets are allocated to the top 10 holdings.


From a sector look, the fund has high exposure to Banks, Diversified Financials and Real Estate, with 32.4%, 26.5% and 19.6% exposure, respectively (as of Sep 29, 2017). The fund’s top three holdings are Berkshire Hathaway Inc Class B (BRK.B - Free Report) , JPMorgan Chase & Co (JPM - Free Report) and Bank of America Corp (BAC - Free Report) with 7.1%, 6.7% and 5.0% allocation, respectively (as of Sep 29, 2017).  The fund has returned 26.3% in a year and 11.2% year to date (as of Oct 2, 2017). IYF currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.


Vanguard Financials ETF (VFH - Free Report)


This fund seeks to provide exposure to financial stocks and tracks the MSCI US Investable Market Financials 25/50 Index. It has AUM of $6.5 billion and charges a fee of only 10 basis points a year. It has 412 holdings and bears significant concentration risk as over 43.5% of the assets are allocated to the top 10 holdings.


From a sector look, the fund has high exposure to Diversified Banks, Regional Banks and Property & Casualty Insurance, with 29.7%, 15.1% and 8.1% exposure, respectively (as of Aug 31, 2017). The fund’s top three holdings are JPMorgan Chase & Co, Wells Fargo & Co (WFC - Free Report) and Bank of America Corp with 8.9%, 6.7% and 6.6% allocation, respectively (as of Aug 31, 2017). The fund has returned 33.6% in a year and 11.0% year to date (as of Oct 2, 2017). VFH currently has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.


Bottom Line


VFH is more popular than IYF, as is evident from its higher AUM. Moreover, it also may be more appealing to investors owing to its cheaper expense ratio.  It also has a more diversified exposure in terms of number of holdings.


Moreover, both the funds have had relatively similar year to date performance. IYF returned a mere 0.2% more than VFH so far this year whereas in a year, VFH clearly outperformed IYF. With growing developments in the sector, these ETFs are poised to offer great growth potential. However, since the factors driving growth in this sector is still in its early stages, a better-ranked ETF like VFH might help alleviate some of the political uncertainties prevailing in the region.


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