The Financial Select Sector SPDR Fund (XLF) and the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) are both among the Top 100 ETFs. XLF is a SPDR State Street Global Advisors Financial fund and LQD is a iShares Corporate Bond fund. So, what’s the difference between XLF and LQD? And which fund is better?
The expense ratio of XLF is 0.02 percentage points lower than LQD’s (0.12% vs. 0.14%). XLF also has a high exposure to the financial services sector while LQD is mostly comprised of BBB bonds. Overall, XLF has provided higher returns than LQD over the past ten years.
In this article, we’ll compare XLF vs. LQD. We’ll look at risk metrics and holdings, as well as at their fund composition and performance. Moreover, I’ll also discuss XLF’s and LQD’s annual returns, portfolio growth, and industry exposure and examine how these affect their overall returns.
Summary
| XLF | LQD | |
| Name | Financial Select Sector SPDR Fund | iShares iBoxx $ Investment Grade Corporate Bond ETF |
| Category | Financial | Corporate Bond |
| Issuer | SPDR State Street Global Advisors | iShares |
| AUM | 40.81B | 40.23B |
| Avg. Return | 12.17% | 6.58% |
| Div. Yield | 1.57% | 2.48% |
| Expense Ratio | 0.12% | 0.14% |
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%.
The iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) is a Corporate Bond fund that is issued by iShares. It currently has 40.23B total assets under management and has yielded an average annual return of 6.58% over the past 10 years. The fund has a dividend yield of 2.48% with an expense ratio of 0.14%.
XLF’s dividend yield is 0.91% lower than that of LQD (1.57% vs. 2.48%). Also, XLF yielded on average 5.59% more per year over the past decade (12.17% vs. 6.58%). The expense ratio of XLF is 0.02 percentage points lower than LQD’s (0.12% vs. 0.14%).
Fund Composition
Holdings
| 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%.
| LQD Bond Sectors | Weight |
| BBB | 50.92% |
| A | 37.97% |
| AA | 8.49% |
| AAA | 2.7% |
| BB | 0.05% |
| Below B | 0.0% |
| B | 0.0% |
| US Government | 0.0% |
| Others | -0.13% |
LQD’s Top Bond Sectors are ratings of BBB, A, AA, AAA, and BB at 50.92%, 37.97%, 8.49%, 2.7%, and 0.05%. The fund is less weighted towards Below B (0.0%), B (0.0%), and US Government (0.0%) rated bonds.
Risk Analysis
| XLF | LQD | |
| Mean Return | 1.21 | 0.47 |
| R-squared | 73.26 | 66.93 |
| Std. Deviation | 18.86 | 5.94 |
| Alpha | 2.63 | 0.52 |
| Beta | 1.15 | 1.62 |
| Sharpe Ratio | 0.74 | 0.85 |
| Treynor Ratio | 11.25 | 3.08 |
The Financial Select Sector SPDR Fund (XLF) has a R-squared of 73.26 with a Treynor Ratio of 11.25 and a Mean Return of 1.21. Its Alpha is 2.63 while XLF’s Sharpe Ratio is 0.74. Furthermore, the fund has a Standard Deviation of 18.86 and a Beta of 1.15.
The iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) has a Alpha of 0.52 with a Beta of 1.62 and a Sharpe Ratio of 0.85. Its Mean Return is 0.47 while LQD’s R-squared is 66.93. Furthermore, the fund has a Treynor Ratio of 3.08 and a Standard Deviation of 5.94.
XLF’s Mean Return is 0.74 points higher than that of LQD and its R-squared is 6.33 points higher. With a Standard Deviation of 18.86, XLF is slightly more volatile than LQD. The Alpha and Beta of XLF are 2.11 points higher and 0.47 points lower than LQD’s Alpha and Beta.
Performance
Annual Returns
| Year | XLF | LQD |
| 2020 | -1.68% | 11.14% |
| 2019 | 31.88% | 17.13% |
| 2018 | -13.09% | -3.76% |
| 2017 | 22.03% | 7.16% |
| 2016 | 22.55% | 5.97% |
| 2015 | -1.6% | -1.08% |
| 2014 | 15.02% | 8.57% |
| 2013 | 35.37% | -2.49% |
| 2012 | 28.53% | 11.68% |
| 2011 | -17.16% | 8.89% |
| 2010 | 11.97% | 9.15% |
XLF had its best year in 2013 with an annual return of 35.37%. XLF’s worst year over the past decade yielded -17.16% and occurred in 2011. In most years the Financial Select Sector SPDR Fund provided moderate returns such as in 2010, 2014, and 2017 where annual returns amounted to 11.97%, 15.02%, and 22.03% respectively.
The year 2019 was the strongest year for LQD, returning 17.13% on an annual basis. The poorest year for LQD in the last ten years was 2018, with a yield of -3.76%. Most years the iShares iBoxx $ Investment Grade Corporate Bond ETF has given investors modest returns, such as in 2017, 2014, and 2011, when gains were 7.16%, 8.57%, and 8.89% respectively.
Portfolio Growth
| Fund | Initial Balance | Final Balance | CAGR |
| XLF | $10,000 | $30,782 | 12.17% |
| LQD | $10,000 | $19,776 | 6.58% |
A $10,000 investment in XLF would have resulted in a final balance of $30,782. This is a profit of $20,782 over 11 years and amounts to a compound annual growth rate (CAGR) of 12.17%.
With a $10,000 investment in LQD, the end total would have been $19,776. This equates to a $9,776 profit over 11 years and a compound annual growth rate (CAGR) of 6.58%.
XLF’s CAGR is 5.59 percentage points higher than that of LQD and as a result, would have yielded $11,006 more on a $10,000 investment. Thus, XLF outperformed LQD by 5.59% annually.
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