The Invesco KBW Bank ETF (KBWB 1.48%) offers a lower-cost entry into the banking sector with higher recent returns, while the First Trust Nasdaq Bank ETF (FTXO 1.20%) provides broader diversification.

Both funds target the domestic banking sector but follow different indexing methodologies to capture the industry performance. While the Invesco KBW Bank ETF tracks a market-cap-weighted index of money centers and regional banks, the First Trust Nasdaq Bank ETF uses a “smart” indexing approach focused on liquidity and fundamental factors such as volatility and growth.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; beta is calculated from five-year monthly returns. The 1-yr return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield.

The Invesco fund is more affordable, charging an expense ratio of 0.35% compared to the 0.6% for the First Trust fund. Additionally, the Invesco fund offers a higher payout for income-seeking investors through its distribution yield.

Performance & risk comparison

What's inside

Invesco KBW Bank ETF (KBWB) focuses entirely on the financial services sector, with 26 holdings representing 100% of the portfolio. Launched in 2011, it weights its positions using a modified market-cap approach to track national money center banks and thrifts. Its largest positions include Morgan Stanley (MS 1.41%) at 9.28%, The Goldman Sachs Group (GS 2.27%) at 8.85%, and Bank of America (BAC 0.58%) at 7.84%. Over the trailing 12 months, the Invesco fund has paid $1.80 per share in dividends.

First Trust Nasdaq Bank ETF (FTXO) also maintains 100% exposure to financial services but uses a broader selection of 42 holdings. Launched in 2016, its top holdings include Citigroup (C 1.46%)at 9.04%, Bank of America at 8.05%, and JPMorgan Chase & Co. (JPM 0.20%) at 7.75%. This fund has a trailing-12-month dividend of $0.68 per share. Both ETFs prioritize U.S.-listed institutions, but FTXO includes more regional players and mid-sized banks than its larger competitor, which tends to lean toward the industry heavyweights.

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Which looks like the better buy

The Invesco KBW Bank ETF (KBWB) and the First Trust Nasdaq Bank ETF (FTXO) are both exchange-traded funds (ETFs) focused on the banking sector. However, they differ in some key respects. Here’s what investors need to know about each of them.

First, let’s start with KBWB. This fund, started in 2011, is focused on national money centers, leading regional banks, and thrifts. Granted, its top holdings include Goldman Sachs, Morgan Stanley, and Bank of America — giant, global banking brands; however, these mega-caps comprise only about a third of the fund’s holdings. The rest is dedicated to smaller companies. Overall, the fund offers exposure at a reasonable cost. The fund charges an expense ratio of 0.35%. Finally, the fund’s 2.0% dividend yield is solid.

Then, there’s FTXO. This fund is slightly more diversified than KBWB, with 42 holdings rather than KBWB’s 26. It also has a greater share of regional banks. As for performance, FTXO has generated a total return of 148% since 2017, with a compound annual growth rate (CAGR) of 9.8%. KBWB, by contrast, has generated a total return of 215%, with a CAGR of 12.6%. Both funds have underperformed the S&P 500, which has generated a total return of 309%, with a CAGR of 15.7%.

In summary, for investors seeking exposure to the U.S. banking sector, KBWB may be of interest due to its lower fees, higher dividend yield, and better long-term performance. However, some investors may still favor FTXO due to its greater diversification.