The Vanguard FTSE Emerging Markets Index Fund ETF Shares (VWO) and the Financial Select Sector SPDR Fund (XLF) are both among the Top 100 ETFs. VWO is a Vanguard Diversified Emerging Mkts fund and XLF is a SPDR State Street Global Advisors Financial fund. So, what’s the difference between VWO and XLF? And which fund is better?
The expense ratio of VWO is 0.02 percentage points lower than XLF’s (0.1% vs. 0.12%). VWO also has a lower exposure to the financial services sector and a lower standard deviation. Overall, VWO has provided lower returns than XLF over the past ten years.
In this article, we’ll compare VWO vs. XLF. We’ll look at fund composition and industry exposure, as well as at their portfolio growth and performance. Moreover, I’ll also discuss VWO’s and XLF’s risk metrics, annual returns, and holdings and examine how these affect their overall returns.
Summary
| VWO | XLF | |
| Name | Vanguard FTSE Emerging Markets Index Fund ETF Shares | Financial Select Sector SPDR Fund |
| Category | Diversified Emerging Mkts | Financial |
| Issuer | Vanguard | SPDR State Street Global Advisors |
| AUM | 117.28B | 40.81B |
| Avg. Return | 5.79% | 12.17% |
| Div. Yield | 1.98% | 1.57% |
| Expense Ratio | 0.1% | 0.12% |
The Vanguard FTSE Emerging Markets Index Fund ETF Shares (VWO) is a Diversified Emerging Mkts fund that is issued by Vanguard. It currently has 117.28B total assets under management and has yielded an average annual return of 5.79% over the past 10 years. The fund has a dividend yield of 1.98% with an expense ratio of 0.1%.
The Financial Select Sector SPDR Fund (XLF) is a Financial fund that is issued by SPDR State Street Global Advisors. It currently has 40.81B total assets under management and has yielded an average annual return of 12.17% over the past 10 years. The fund has a dividend yield of 1.57% with an expense ratio of 0.12%.
VWO’s dividend yield is 0.41% higher than that of XLF (1.98% vs. 1.57%). Also, VWO yielded on average 6.38% less per year over the past decade (5.79% vs. 12.17%). The expense ratio of VWO is 0.02 percentage points lower than XLF’s (0.1% vs. 0.12%).
Fund Composition
Industry Exposure
| VWO | XLF | |
| Technology | 17.06% | 0.0% |
| Industrials | 5.95% | 0.0% |
| Energy | 5.48% | 0.0% |
| Communication Services | 11.41% | 0.0% |
| Utilities | 2.55% | 0.0% |
| Healthcare | 5.33% | 0.0% |
| Consumer Defensive | 5.87% | 0.0% |
| Real Estate | 3.13% | 0.0% |
| Financial Services | 18.15% | 100.0% |
| Consumer Cyclical | 16.1% | 0.0% |
| Basic Materials | 8.98% | 0.0% |
The Vanguard FTSE Emerging Markets Index Fund ETF Shares (VWO) has the most exposure to the Financial Services sector at 18.15%. This is followed by Technology and Consumer Cyclical at 17.06% and 16.1% respectively. Real Estate (3.13%), Healthcare (5.33%), and Energy (5.48%) only make up 13.94% of the fund’s total assets.
VWO’s mid-section with moderate exposure is comprised of Consumer Defensive, Industrials, Basic Materials, Communication Services, and Consumer Cyclical stocks at 5.87%, 5.95%, 8.98%, 11.41%, and 16.1%.
The Financial Select Sector SPDR Fund (XLF) has the most exposure to the Financial Services sector at 100.0%. This is followed by Technology and Industrials at 0.0% and 0.0% respectively. Consumer Cyclical (0.0%), Real Estate (0.0%), and Consumer Defensive (0.0%) only make up 0.00% of the fund’s total assets.
XLF’s mid-section with moderate exposure is comprised of Healthcare, Utilities, Communication Services, Energy, and Industrials stocks at 0.0%, 0.0%, 0.0%, 0.0%, and 0.0%.
VWO is 81.85% less exposed to the Financial Services sector than XLF (18.15% vs 100.0%). VWO’s exposure to Technology and Consumer Cyclical stocks is 17.06% higher and 16.10% higher respectively (17.06% vs. 0.0% and 16.1% vs. 0.0%). In total, Real Estate, Healthcare, and Energy also make up 13.94% more of the fund’s holdings compared to XLF (13.94% vs. 0.00%).
Holdings
| VWO Holdings | Weight |
| Tencent Holdings Ltd | 5.29% |
| Alibaba Group Holding Ltd Ordinary Shares | 4.73% |
| Taiwan Semiconductor Manufacturing Co Ltd | 4.58% |
| Meituan | 1.88% |
| Taiwan Semiconductor Manufacturing Co Ltd ADR | 1.7% |
| Reliance Industries Ltd Shs Dematerialised | 1.06% |
| Naspers Ltd Class N | 1.01% |
| Vale SA | 0.92% |
| Infosys Ltd | 0.91% |
| China Construction Bank Corp Class H | 0.84% |
VWO’s Top Holdings are Tencent Holdings Ltd, Alibaba Group Holding Ltd Ordinary Shares, Taiwan Semiconductor Manufacturing Co Ltd, Meituan, and Taiwan Semiconductor Manufacturing Co Ltd ADR at 5.29%, 4.73%, 4.58%, 1.88%, and 1.7%.
Reliance Industries Ltd Shs Dematerialised (1.06%), Naspers Ltd Class N (1.01%), and Vale SA (0.92%) have a slightly smaller but still significant weight. Infosys Ltd and China Construction Bank Corp Class H are also represented in the VWO’s holdings at 0.91% and 0.84%.
| XLF Holdings | Weight |
| Berkshire Hathaway Inc Class B | 12.83% |
| JPMorgan Chase & Co | 11.47% |
| Bank of America Corp | 7.57% |
| Wells Fargo & Co | 4.56% |
| Citigroup Inc | 3.56% |
| Morgan Stanley | 3.32% |
| Goldman Sachs Group Inc | 3.15% |
| BlackRock Inc | 3.02% |
| Charles Schwab Corp | 2.66% |
| American Express Co | 2.62% |
XLF’s Top Holdings are Berkshire Hathaway Inc Class B, JPMorgan Chase & Co, Bank of America Corp, Wells Fargo & Co, and Citigroup Inc at 12.83%, 11.47%, 7.57%, 4.56%, and 3.56%.
Morgan Stanley (3.32%), Goldman Sachs Group Inc (3.15%), and BlackRock Inc (3.02%) have a slightly smaller but still significant weight. Charles Schwab Corp and American Express Co are also represented in the XLF’s holdings at 2.66% and 2.62%.
Risk Analysis
| VWO | XLF | |
| Mean Return | 0.45 | 1.21 |
| R-squared | 81.69 | 73.26 |
| Std. Deviation | 17.64 | 18.86 |
| Alpha | -1.36 | 2.63 |
| Beta | 1.06 | 1.15 |
| Sharpe Ratio | 0.27 | 0.74 |
| Treynor Ratio | 3.14 | 11.25 |
The Vanguard FTSE Emerging Markets Index Fund ETF Shares (VWO) has a Treynor Ratio of 3.14 with a Sharpe Ratio of 0.27 and a Standard Deviation of 17.64. Its Mean Return is 0.45 while VWO’s R-squared is 81.69. Furthermore, the fund has a Alpha of -1.36 and a Beta of 1.06.
The Financial Select Sector SPDR Fund (XLF) has a R-squared of 73.26 with a Mean Return of 1.21 and a Beta of 1.15. Its Treynor Ratio is 11.25 while XLF’s Alpha is 2.63. Furthermore, the fund has a Standard Deviation of 18.86 and a Sharpe Ratio of 0.74.
VWO’s Mean Return is 0.76 points lower than that of XLF and its R-squared is 8.43 points higher. With a Standard Deviation of 17.64, VWO is slightly less volatile than XLF. The Alpha and Beta of VWO are 3.99 points lower and 0.09 points lower than XLF’s Alpha and Beta.
Performance
Annual Returns
| Year | VWO | XLF |
| 2020 | 15.32% | -1.68% |
| 2019 | 20.4% | 31.88% |
| 2018 | -14.57% | -13.09% |
| 2017 | 31.38% | 22.03% |
| 2016 | 11.75% | 22.55% |
| 2015 | -15.35% | -1.6% |
| 2014 | 0.6% | 15.02% |
| 2013 | -5.0% | 35.37% |
| 2012 | 18.84% | 28.53% |
| 2011 | -18.68% | -17.16% |
| 2010 | 18.99% | 11.97% |
VWO had its best year in 2017 with an annual return of 31.38%. VWO’s worst year over the past decade yielded -18.68% and occurred in 2011. In most years the Vanguard FTSE Emerging Markets Index Fund ETF Shares provided moderate returns such as in 2014, 2016, and 2020 where annual returns amounted to 0.6%, 11.75%, and 15.32% respectively.
The year 2013 was the strongest year for XLF, returning 35.37% on an annual basis. The poorest year for XLF in the last ten years was 2011, with a yield of -17.16%. Most years the Financial Select Sector SPDR Fund has given investors modest returns, such as in 2010, 2014, and 2017, when gains were 11.97%, 15.02%, and 22.03% respectively.
Portfolio Growth
| Fund | Initial Balance | Final Balance | CAGR |
| VWO | $10,000 | $16,200 | 5.79% |
| XLF | $10,000 | $30,782 | 12.17% |
A $10,000 investment in VWO would have resulted in a final balance of $16,200. This is a profit of $6,200 over 11 years and amounts to a compound annual growth rate (CAGR) of 5.79%.
With a $10,000 investment in XLF, the end total would have been $30,782. This equates to a $20,782 profit over 11 years and a compound annual growth rate (CAGR) of 12.17%.
VWO’s CAGR is 6.38 percentage points lower than that of XLF and as a result, would have yielded $14,582 less on a $10,000 investment. Thus, VWO performed worse than XLF by 6.38% annually.
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