The Invesco KBW Bank ETF (KBWB 0.28%) targets a concentrated selection of large-cap money center institutions, whereas the State Street SPDR S&P Bank ETF (KBE 1.09%) employs an equal-weighted strategy across a broader range of 103 banking stocks.

Investors often turn to the banking sector to express a view on interest rate cycles and the broader health of the U.S. economy. While both funds provide pure-play access to financial services, their construction methods lead to different risk profiles. This comparison looks at how the concentrated cap-weighted approach of one fund differs from the diversified equal-weighted model of the other.

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.

Both funds offer an identical expense ratio of 0.35%, making them equally cost-effective choices for sector exposure. In terms of income, the payout gap is minimal, with the State Street fund providing a slightly higher trailing yield of 2.10% compared to 2.00% for the Invesco fund.

Performance & risk comparison

What's inside

The Invesco KBW Bank ETF focuses on 26 of the largest banking institutions in the country. Its portfolio is 100% concentrated in financial services, utilizing a market-cap weighting methodology that favors national money center banks and major regional establishments. Its largest positions include Bank of America Corp (BAC +0.63%) at 8.25%, JPMorgan Chase & Co (JPM +0.12%) at 8.17%, and Wells Fargo & Co (WFC 0.50%) at 7.96%. The fund was launched in 2011. It has paid $1.86 per share over the trailing 12 months, which on its recent ~$92.98 share price works out to a 2.00% yield.

The State Street SPDR S&P Bank ETF tracks the S&P Banks Select Industry Index, spreading exposure across 103 holdings. Unlike its cap-weighted peer, this fund uses a modified equal-weighted approach, which provides greater influence to mid- and small-cap regional banks. The portfolio is 100% concentrated in financial services, and its top holdings include Rocket Cos Inc (RKT 0.51%) at 1.15%, Nicolet Bankshares Inc (NIC 1.24%) at 1.05%, and The Bancorp Inc (TBBK 1.01%) at 1.05%. The fund was launched in 2005. It has paid $1.47 per share over the trailing 12 months, which on its recent ~$68.22 share price works out to a 2.10% yield.

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What this means for investors

These are two of the leading ETFs that focus on bank stocks. But there are key differences between the two. KBWB invests in an index that only includes large banks, with roughly 26 names in the portfolio. KBE is much broader, tracking banks of various cap sizes with some 103 holdings.

The performance of the two over the years is pretty similar. KBE, up 14%, has a higher return year-to-date, but KBWB has been better over the past year, up around 30%. KBWB also holds the return advantage over the past five and 10 year periods — up 11% and 14%, respectively. KBE is up 9% and 11% on an annualized basis over the past five and 10 years, respectively. These numbers are on a total return basis.

KBE has a slightly higher distribution yield at 2.12% to 1.97% for KBWB.

Which one you prefer depends on what you are looking for. The KBE ETF tends to perform better in down markets, offering more portfolio balance and downside protection. It also has a slightly higher dividend payout and the returns are very similar. Investors in bank stocks may not necessarily be looking for alpha, but may want diversification and portfolio balance. Plus, KBE is equal-weighted and not cap-weighted, providing even more diversification. For these reasons I would probably favor KBE.