The Financial Sector is an essential component of the economy, providing both cyclical growth potential and reliable Dividend income. The two titans of financial sector investing are **XLF (Financial Select Sector SPDR Fund)** and **VFH (Vanguard Financials ETF)**.
They cover banks, insurance companies, and capital markets, but one critical difference sets them apart: **Berkshire Hathaway**. This manual will explain why Warren Buffett's empire is included in one fund but excluded from the other, and which one is the better long-term choice.
XLF: The Concentrated Player (SPDR)
**XLF** tracks the Financial Select Sector Index, which is composed only of the financial companies listed in the S&P 500.
The Drawback: It famously excludes Berkshire Hathaway because Berkshire is not classified purely as a Financials company under the GICS sector standard. This exclusion means XLF misses out on one of the largest and most stable components of the financial world.
VFH: The Broad Alternative (Vanguard)
**VFH** tracks the MSCI US Investable Market Index (IMI) Financials 25/50 Index.
The Advantage: VFH's index classification is broader, allowing it to hold **Berkshire Hathaway**. Furthermore, it is much more diversified, holding over 400 stocks (including mid and small-cap financials), whereas XLF holds only about 100.
Comparison Matrix (XLF vs VFH)
The cost and diversification differences are substantial.
| Feature | XLF (SPDR) | VFH (Vanguard) |
|---|---|---|
| Number of Holdings | ~100 (S&P 500 only) | ~400 (Broad IMI) |
| Expense Ratio | 0.10% | 0.10% (Same) |
| Includes B. Hathaway? | No | Yes |
| Verdict | High Liquidity for Traders | Better Diversification |
The Verdict: VFH is the Superior Long-Term Hold
Reason 1: Higher Diversification
VFH includes small and mid-cap financial companies, giving it exposure to the entire U.S. financial market, not just the large-cap giants in the S&P 500. This broader base provides more stability.
Reason 2: Inclusion of Berkshire Hathaway
Excluding one of the largest and most financially-oriented companies in the world from a Financial Sector ETF is a significant flaw in XLF's index design. **VFH** provides a more complete picture of the U.S. financial landscape.
Conclusion: VFH for Investors, XLF for Traders
For long-term, passive investors seeking comprehensive exposure to the Financial Sector, **VFH** is the clear winner due to its superior diversification and inclusion of Berkshire Hathaway. XLF is typically preferred only by institutional traders due to its higher liquidity.
