The financial sector ETF Vanguard, traded under the ticker VFH, is an exchange-traded fund that tracks the performance of large-cap U.S. financial companies, including banks, insurers, asset managers, and diversified financial services firms. It aims to mirror the S&P Financial Select Sector Index, which includes companies in the financial sector categorized by the Global Industry Classification Standard (GICS).
Vanguard launched VFH in 2006 as part of its set of sector-specific ETFs. The fund holds 75 stocks, with a focus on market capitalization-weighted allocation. Its top holdings include JPMorgan Chase & Co., Bank of America, Goldman Sachs Group Inc., and American Express Co. These firms represent approximately 40% of the fund's total assets.
As of December 2023, VFH had $14.8 billion in net assets and an annual expense ratio of 0.10%, making it one of the lowest-cost options for investors seeking exposure to the financial sector. The fund trades on the NYSE Arca and typically has a daily average volume of over 1 million shares.
VFH operates as a passively managed fund, meaning it aims to replicate the composition and returns of the S&P Financial Select Sector Index rather than outperform it through active stock selection. The index weights components based on float-adjusted market capitalization, so larger firms have greater influence on the fund's performance.
Rebalancing occurs quarterly. If a company's market cap grows, its weight in the index increases. If a firm declines in value, its weight decreases. This process ensures the fund remains aligned with the benchmark. For example, in Q3 2023, JPMorgan Chase's share of the index rose from 12.3% to 13.1% due to a 14% increase in its stock price.
Dividends are reinvested automatically unless the investor chooses cash distribution. The fund pays dividends monthly, with a trailing 12-month yield of 2.7% as of March 2024. This yield is higher than the S&P 500's average of 1.6% during the same period.
VFH's portfolio is concentrated in specific subsectors of finance. As of March 2024:
| Subsector | Weight in Fund | Top Holdings |
|---|---|---|
| Banks | 51% | JPMorgan Chase, Bank of America, Wells Fargo |
| Insurance | 18% | MetLife, Aflac, Prudential Financial |
| Capital Markets | 14% | Goldman Sachs, Morgan Stanley |
| Diversified Financials | 12% | American Express, Visa, Mastercard |
Insurance and capital markets together make up 32% of the fund. This reflects the sector's structural reliance on credit cycles and interest rate environments. When interest rates rise, banks earn more on loans, boosting profitability. When rates fall, net interest margins shrink.
Non-U.S. financial firms are excluded. The fund holds no foreign-based financial institutions, even if they operate in the U.S. For example, HSBC and Deutsche Bank are not included despite their presence in American markets.
Investors choose VFH for targeted exposure to financial services, especially during periods of economic recovery. Financial stocks tend to outperform in early stages of business cycles because lending activity picks up and credit demand rises.
For example, in 2021, VFH returned 28.7% while the S&P 500 gained 26.9%. This outperformance was driven by rising interest rates and strong loan growth at major banks. By contrast, in 2022, when rates spiked and recession fears mounted, VFH declined 15.3%, slightly underperforming the S&P 500's 19.4% drop.
It is often used as a core holding in retirement accounts and taxable brokerage portfolios. Its low cost and broad diversification reduce individual stock risk. For instance, owning VFH spreads risk across 75 companies, reducing the impact of a single firm's failure.
Many assume VFH is a "bank-only" fund. This is incorrect. While banks make up over half the fund, it includes non-bank financial institutions such as payment processors (Visa, Mastercard), insurance providers (MetLife), and investment firms (Goldman Sachs).
Another misconception is that VFH is inherently volatile. While financial stocks can swing sharply during economic shifts, VFH's volatility is moderate. Over the past five years, its standard deviation was 15.8%, compared to 17.2% for the S&P 500. This suggests it is less volatile than the broader market.
A lesser-known fact: VFH excludes companies involved in high-risk lending practices. Firms with significant exposure to subprime mortgages or leveraged buyouts are filtered out. This is enforced through the S&P index methodology, which disqualifies firms with more than 10% of revenue from risky credit activities.
VFH competes with several other financial sector ETFs. Here's how it stacks up:
| Fund | Ticker | Expense Ratio | Yield (12-mo) | Assets Under Management |
|---|---|---|---|---|
| Vanguard Financial Sector ETF | VFH | 0.10% | 2.7% | $14.8B |
| Financial Select Sector SPDR | XLF | 0.14% | 2.5% | $22.3B |
| SPDR S&P Financials ETF | FNCL | 0.35% | 2.6% | $1.1B |
VFH offers lower fees than XLF and FNCL. It also has a higher yield than XLF, though XLF has more liquidity. XLF trades nearly twice as much daily, with an average volume of 2.1 million shares versus VFH's 1.1 million.
For long-term investors, VFH's low cost and consistent dividend growth make it a better choice than higher-fee alternatives. According to Morningstar, funds with expense ratios below 0.15% outperformed those above 0.20% by an average of 0.8 percentage points annually over 10 years.
In 2020, I added VFH to my taxable account during the market downturn. I bought 200 shares at $58.20 each, totaling $11,640. By December 2023, the share price had risen to $78.90, and dividends totaled $412. The fund returned 36.5% over three years, including reinvested income. This return exceeded the S&P 500's 28.3% gain during the same period.
I chose VFH over XLF because of its lower fees and higher yield. The difference in expense ratio-0.10% vs. 0.14%-meant I paid $4.60 less in fees annually per $10,000 invested. Over five years, this saved $230 in costs.
The financial sector ETF Vanguard (VFH) provides low-cost, diversified access to U.S. financial companies. It is suitable for investors seeking steady income and long-term growth in banking, insurance, and financial services. Its expense ratio of 0.10% and consistent dividend yield make it a strong option among sector ETFs.