In an investing environment characterized by increasing uncertainty and the prospect of interest rates remaining at artificially depressed levels for some time to come, a number of investors are weighing portfolio choices between broad financial sector ETFs such as the Financial Select Sector SPDR Fund (NYSEARCA: XLF) against more narrowly focused funds such as the SPDR S&P Regional Banking ETF (NYSEARCA: KRE). Traditional bank stock wisdom favors the broader financial sector ETF, the Financial Select Sector SPDR Fund, with its emphasis on large-cap major money center banks. Major banks such as JPMorgan Chase & Company (NYSE: JPM) or Bank of America Corporation (NYSE: BAC) generate proportionately greater revenue from service fees than do smaller, regional banks that are more dependent on revenues from net interest margin. Therefore, a persistently low interest rate environment ordinarily favors major banks over regional banks.

However, an examination of the performance of the two ETFs as of May 2016 shows remarkably similar returns over the period from 2010 to 2015. The closeness in performance results is at least somewhat surprising, given the dissimilarity between the two fund portfolios. The Financial Select Sector SPDR Fund is a much broader fund, encompassing major banks, insurance firms and real estate investment trusts (REITs), and it heavily favors large-cap stocks. The SPDR S&P Regional Banking ETF has a narrow focus on regional banks and uses an index tilted in favor of smaller market cap firms.

Financial Select Sector SPDR ETF

The Financial Select Sector SPDR ETF was launched by State Street Global Advisors in 1998 and has $16.3 in total assets under management (AUM). It tracks the market cap-weighted S&P Financial Select Sector Index, which is designed to reflect the overall performance of U.S.-listed equities in the financial sector, including banks and thrifts, insurance firms, diversified financial services providers, consumer finance companies, capital markets and REITs. The fund's portfolio is tilted toward major large-cap financial firms such as the top three holdings: Berkshire Hathaway Inc. (NYSE: BRK.B), Wells Fargo & Company (NYSE: WFC) and JPMorgan Chase. The fund contains approximately 90 holdings all together, but the top five account for 34.4% of the portfolio assets, so there is significant concentration risk.

The expense ratio for the Financial Select Sector SPDR ETF is a low 0.14% compared to the financial category average of 0.39%. The dividend yield is 2.13%. The fund's five-year average annualized return as of May 2016 is 9.56%, outperforming a category average of 8.21%. The three-year average return is 8.68%, again outperforming the category average 7.05%. The one-year return is negative 3.46%, but that's still a better showing than the negative 4.08% category average.

SPDR S&P Regional Banking ETF

State Street created the SPDR S&P Regional Banking ETF in 2006. It is the most popular regional banking ETF, with $1.7 billion in AUM. This ETF tracks the equal-weighted S&P Regional Banks Select Industry Index, which aims to reflect the performance of just one slice of the U.S. banking industry, U.S. regional bank stocks. This fund also has approximately 90 holdings, but there is much less concentration at the top, with the top five holdings accounting for only 14.1% of the total portfolio. The top three holdings are SunTrust Banks Inc. (NYSE: STI), Regions Financial Corporation (NYSE: RF) and KeyCorp (NYSE: KEY). Small-cap and mid-cap stocks are more predominant in the SPDR S&P Regional Banking ETF portfolio than they are in the Financial Select Sector SPDR ETF.

The fund's expense ratio is 0.35%, much closer to the category average of 0.39%. The dividend yield is 1.91%. The five-year average annualized return is 10.38%, about three-quarters of a point higher than the Financial Select Sector SPDR Fund's return. The three-year average annualized return of 9.17% is about one-third of a percentage point below the Financial Select Sector SPDR Fund's 9.56% return. The one-year return is negative 2.9%, about half a percentage point better than the Financial Select Sector SPDR Fund's negative 3.46%.

A Tale of Two ETFs

Each of these State Street ETFs leads their respective categories, financial equities ETFs and regional banking ETFs, in terms of total AUM. While the respective portfolios of financial sector stocks could hardly be more dissimilar, the investment returns for these two ETFs are roughly within a percentage point of each other over any given long-term time frame.

A continuing depressed-rate environment logically favors the large-cap Financial Select Sector SPDR Fund. If interest rates continue at near-zero levels for an extended time period, the broader revenue base of larger banks may indeed prove more resilient for investors than that of regional banks. This may be reflected in the fact that in May 2016, the Financial Select Sector SPDR Fund is only down 1.27% year to date (YTD), while the SPDR S&P Regional Banking ETF is down 5.33%.

Still, investors should take note of the SPDR S&P Regional Banking ETF's strong performance. Since the 2008 financial crisis, choosing one of these ETFs over the other might largely be considered a coin flip in terms of returns for investors.

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