XLF vs. VMBS: What’s The Difference?

The Financial Select Sector SPDR Fund (XLF) and the Vanguard Mortgage-Backed Securities Index Fund ETF Shares (VMBS) are both among the Top 100 ETFs. XLF is a SPDR State Street Global Advisors Financial fund and VMBS is a Vanguard Intermediate Government fund. So, what’s the difference between XLF and VMBS? And which fund is better?

The expense ratio of XLF is 0.07 percentage points higher than VMBS’s (0.12% vs. 0.05%). XLF also has a high exposure to the financial services sector while VMBS is mostly comprised of AAA bonds. Overall, XLF has provided higher returns than VMBS over the past ten years.

In this article, we’ll compare XLF vs. VMBS. We’ll look at annual returns and performance, as well as at their risk metrics and fund composition. Moreover, I’ll also discuss XLF’s and VMBS’s portfolio growth, industry exposure, and holdings and examine how these affect their overall returns.

Summary

XLF VMBS
Name Financial Select Sector SPDR Fund Vanguard Mortgage-Backed Securities Index Fund ETF Shares
Category Financial Intermediate Government
Issuer SPDR State Street Global Advisors Vanguard
AUM 40.81B 16.61B
Avg. Return 12.17% 2.89%
Div. Yield 1.57% 1.23%
Expense Ratio 0.12% 0.05%

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 Vanguard Mortgage-Backed Securities Index Fund ETF Shares (VMBS) is a Intermediate Government fund that is issued by Vanguard. It currently has 16.61B total assets under management and has yielded an average annual return of 2.89% over the past 10 years. The fund has a dividend yield of 1.23% with an expense ratio of 0.05%.

XLF’s dividend yield is 0.34% higher than that of VMBS (1.57% vs. 1.23%). Also, XLF yielded on average 9.27% more per year over the past decade (12.17% vs. 2.89%). The expense ratio of XLF is 0.07 percentage points higher than VMBS’s (0.12% vs. 0.05%).

Fund Composition

Holdings

XLF - 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%.

VMBS - Holdings

VMBS Bond Sectors Weight
AAA 100.01%
Below B 0.0%
B 0.0%
BB 0.0%
BBB 0.0%
A 0.0%
AA 0.0%
US Government 0.0%
Others -0.01%

VMBS’s Top Bond Sectors are ratings of AAA, Below B, B, BB, and BBB at 100.01%, 0.0%, 0.0%, 0.0%, and 0.0%. The fund is less weighted towards A (0.0%), AA (0.0%), and US Government (0.0%) rated bonds.

Risk Analysis

XLF VMBS
Mean Return 1.21 0.21
R-squared 73.26 65.78
Std. Deviation 18.86 2.02
Alpha 2.63 0.37
Beta 1.15 0.54
Sharpe Ratio 0.74 0.94
Treynor Ratio 11.25 3.47

The Financial Select Sector SPDR Fund (XLF) has a R-squared of 73.26 with a Alpha of 2.63 and a Standard Deviation of 18.86. Its Beta is 1.15 while XLF’s Treynor Ratio is 11.25. Furthermore, the fund has a Sharpe Ratio of 0.74 and a Mean Return of 1.21.

The Vanguard Mortgage-Backed Securities Index Fund ETF Shares (VMBS) has a Beta of 0.54 with a Mean Return of 0.21 and a Alpha of 0.37. Its Standard Deviation is 2.02 while VMBS’s R-squared is 65.78. Furthermore, the fund has a Sharpe Ratio of 0.94 and a Treynor Ratio of 3.47.

XLF’s Mean Return is 1.00 points higher than that of VMBS and its R-squared is 7.48 points higher. With a Standard Deviation of 18.86, XLF is slightly more volatile than VMBS. The Alpha and Beta of XLF are 2.26 points higher and 0.61 points higher than VMBS’s Alpha and Beta.

Performance

Annual Returns

XLF vs. VMBS - Annual Returns

Year XLF VMBS
2020 -1.68% 3.77%
2019 31.88% 6.17%
2018 -13.09% 0.87%
2017 22.03% 2.37%
2016 22.55% 1.43%
2015 -1.6% 1.43%
2014 15.02% 5.81%
2013 35.37% -1.28%
2012 28.53% 2.47%
2011 -17.16% 5.89%
2010 11.97% 5.24%

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 VMBS, returning 6.17% on an annual basis. The poorest year for VMBS in the last ten years was 2013, with a yield of -1.28%. Most years the Vanguard Mortgage-Backed Securities Index Fund ETF Shares has given investors modest returns, such as in 2017, 2012, and 2020, when gains were 2.37%, 2.47%, and 3.77% respectively.

Portfolio Growth

XLF vs. VMBS - Portfolio Growth

Fund Initial Balance Final Balance CAGR
XLF $10,000 $27,491 12.17%
VMBS $10,000 $13,265 2.89%

A $10,000 investment in XLF would have resulted in a final balance of $27,491. This is a profit of $17,491 over 10 years and amounts to a compound annual growth rate (CAGR) of 12.17%.

With a $10,000 investment in VMBS, the end total would have been $13,265. This equates to a $3,265 profit over 10 years and a compound annual growth rate (CAGR) of 2.89%.

XLF’s CAGR is 9.27 percentage points higher than that of VMBS and as a result, would have yielded $14,226 more on a $10,000 investment. Thus, XLF outperformed VMBS by 9.27% annually.


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