VFH vs XLF: Comparison By An Expert

The Vanguard Financials Index Fund ETF (VFH) and State Street’s The Financial Select Sector SPDR Fund (XLF) are two of the largest financial sector ETFs and two of the most popular among individual investors. Many investors compare VFH vs XLF because they are so similar. The funds are quite similar with one important difference.

A quick reminder that this site does NOT provide investment recommendations. Fund comparisons (such as this one) are not conducted to identify the “best” fund (since that will vary from investor to investor based on investor-specific factors). Rather, these fund comparison posts are designed to identify and distinguish between the fund details that matter versus the ones that don’t.

The Short Answer

The primary difference between the funds is that XLF is a large-cap fund, while VFH includes mid-caps and small-caps.

Choosing XLF vs VFH is essentially a very small bet on whether larger cap or smaller cap stocks will outperform, which has been an inconsequential decision except during the 2007-2009 crisis.

The Longer Answer

Historical Performance: VFH vs XLF

XLF was launched back in 1998, while VFH was launched in 2004. Since the VFH’s launch, the two funds have performed incredibly similarly, with an annualized difference of .81%. The cumulative performance differential over that timeframe is roughly 34%.

However, there is more to the story here. Much of XLK’s relative underperformance was during the 2007-2009 financial crisis, when the large financial institutions crashed, taken over by the government, diluted, etc. If we chart the two ETFs from the end of 2009, they have identical performance of 10.60% annualized!

Portfolio Exposures: VFH vs XLF

XLF tracks the Financial Select Sector Index, which is essentially a sub-index of the S&P 500 (which is predominantly composed of large-caps). It has changed over the years, but the index that VFH currently tracks is includes more mid-caps and small-caps (even though it is also predominantly large-caps).

Geographic Exposure

Both VFH and XLF hold essentially 100% stocks, so I will not dig into country exposures or market classification here. For all intents and purposes, the two funds have identical geographic exposures.

Market Cap Exposure

As the below data illustrates, XLF primarily holds large-caps, while VFH is a bit more diversified in terms of market cap. Despite this difference, both funds are market-cap weighted and risk/return is overwhelmingly driven by the large-cap exposure.

Large Cap82%64%
Mid Cap18%21%
Small Cap0%11%
Source: ThoughtfulFinance.com, Morningstar (data as of 1/31/2023 for VFH & 2/10/2023 for XLF)

Sector Exposure

VFH and XLF are financials ETFs and so their holdings are 100% financial stocks.

Practical Factors: VFH vs XLF

Transaction Costs

As ETFs, both XLF and VFH are free to trade on many platforms. Bid-ask spreads for both VFH and XLF are extremely low and volume is sufficient to prevent most individual investors from “moving the market.”


The expense ratio for both XLF and VFH is .10%. At these low levels of expense ratios, small differences in expense ratios does not typically matter anyways. Something to keep in mind if one fund or the other decides to reduce fees.

Tax Efficiency & Capital Gain Distributions

Neither VFH nor XLF has ever made a capital gains distribution and I do not expect them to make any moving forward. In my opinion, these two funds are equally tax-efficient.

Options Strategies

The one factor that may sway someone towards XLF is if they are managing some type of option strategy, such as covered calls. The options market for XLF is much more active than for VIS. Of course, if someone wants to trade options without triggering tax consequences in another part of their portfolio, perhaps VIS is the better pick for the non-option holding.

Bottom Line: VFH vs XLF

VFH and XLF are pretty similar and I would not spend too much time comparing them or trying to decide which is better. I believe investors’ time is better spent evaluating and thinking through more material decisions.

Investors looking for additional vehicles may want to consider Fidelity’s financials ETF and should read my comparison of FNCL vs VFH. Those looking for a mutual fund should read my comparison of VFH vs VFAIX (which is the mutual fund share class of VFH).

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