Exchange Traded Funds (ETFs)

Vanguard’s Powerhouse Buy-and-Hold Financial Fund

With total assets under management of $5.7 billion, the Vanguard Financials ETF (VFH) is a powerhouse exchange-traded fund (ETF) managed by the Vanguard Group, a giant American investment firm.

Unlike many of its peers, VFH is passively managed, so it employs an indexing strategy that fully replicates the MSCI U.S. Investable Market Financials 25/50 index. That index includes financial stocks in the top 98% of the U.S. market by capitalization. With VFH investing at least 90% of its total assets in this benchmark index, the fund offers excellent exposure to the broader financial market.

On the surface, VFH may not seem very different from other large financial sector funds, such as the Financial Select Sector SPDR ETF (XLF). However, with over 400 holdings in total, VFH offers considerably greater depth of exposure to the financial market than many of its peer funds, most of which have fewer than 100 holdings each. VFH is non-diversified.

With an average daily trading volume of $65.7 million, VFH trades well and can boast strong liquidity as one of its main advantages. Also, VFH charges a distinguishingly low expense ratio of 0.10%. According to data from Morningstar, the average expense ratio for financial funds is around 0.40%.

The chart below shows that VFH rose sharply in late 2016, resulting in a one-year return of 45.31%, far above the S&P 500’s return of 13.18%. VFH’s year-to-date return is 5.09%, again surpassing the S&P 500 over the same time period. The fund currently trades in the price range of $60-$64, very near its 52-week high of $64.20 and a marked increase from the $45 price range it hovered around at the beginning of 2016.

In September 2016, VFH pulled out all of its holdings in real estate investment trusts (REITs) and shifted its focus more heavily towards the U.S. banking industry. Investors will recognize many of the holdings in VFH’s portfolio. The fund’s top five holdings are JPMorgan Chase & Co. (JPM), 8.70%; Wells Fargo & Co. (WFC), 7.68%; Bank of America Corp. (BAC), 6.57%; Berkshire Hathaway Inc. B (BRK.B), 5.69%; and Citigroup Inc. (C), 4.62%.

If you are seeking comprehensive exposure to the U.S. financial sector, I encourage you to look at the Vanguard Financials ETF (VFH) as a possible addition to your portfolio.

As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You just may see your question answered in a future ETF Talk.

Jim Woods

Jim Woods is a 20-plus-year veteran of the markets with varied experience as a broker, hedge fund trader, financial writer, author and newsletter editor. Jim is the editor of Intelligence Report, Investing Edge, the Bullseye Stock Trader, and The Deep Woods (formerly the Weekly ETF Report). His books include co-authoring, “Billion Dollar Green: Profit from the Eco Revolution,” and “The Wealth Shield: How to Invest and Protect Your Money from Another Stock Market Crash, Financial Crisis or Global Economic Collapse.” He’s also ghostwritten many books and articles, as well as edited content for some of the investment industry’s biggest luminaries. His articles have appeared on many leading financial websites, including StockInvestor.com, InvestorPlace.com, Main Street Investor, MarketWatch, Street Authority, Human Events and many others. Jim formerly worked with Investor’s Business Daily founder William J. O’Neil, helping to author training courses in the CANSLIM stock-picking methodology. The independent firm TipRanks rates Jim the No. 3 financial blogger in the world (out of more than 6,000). TipRanks calculates that, since 2012, he's made 361 successful recommendations out of 499 total, earning a success rate of 72% and a +15.3% average return per recommendation. He is known in professional and personal circles as “The Renaissance Man,” because his expertise includes such varied fields as composing and performing music; Western horsemanship, combat marksmanship, martial arts, auto racing and bodybuilding. Jim holds a BA in philosophy from the University of California, Los Angeles, and is a former U.S. Army paratrooper. A self-described “radical for capitalism,” he celebrates the virtue of making money from his Southern California horse ranch.