The choice between State Street Financial Select Sector SPDR ETF (NYSEMKT:XLF) and ProShares – Ultra Financials (NYSEMKT:UYG) hinges on whether an investor seeks standard, low-cost sector exposure or amplified daily returns through leverage.
Investors seeking to gain exposure to the financial sector generally choose between standard index tracking or amplified daily results. The State Street Financial Select Sector SPDR ETF provides broad access to the financial segment of the S&P 500, whereas the ProShares – Ultra Financials seeks to double the daily performance of the same sector. This comparison looks at how their different mechanics impact total returns and risk profiles.
Snapshot (cost & size)
Beta measures price volatility relative to the S&P 500; beta is calculated from monthly returns over the available fund history (up to five years). The 1-yr return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield.
The cost difference between these two funds is stark. The State Street Financial Select Sector SPDR ETF charges a lean 0.08%, while the ProShares – Ultra Financials is much more expensive with a 0.94% expense ratio. This higher fee reflects the complexity of the leveraged strategy, which also results in a significantly higher trailing-12-month dividend yield for the ProShares fund.
Performance & risk comparison
What’s inside
The State Street Financial Select Sector SPDR ETF (NYSEMKT:XLF) focuses on financial services, insurance, and banking. Its largest positions include JPMorgan Chase (NYSE:JPM) at 11.64%, Berkshire Hathaway (NYSE:BRKB) at 11.21%, and Visa (NYSE:V) at 7.38%. The portfolio reflects 98% in financial services and 2% in technology. It holds 76 securities. The fund was launched in 1998. State Street Financial Select Sector SPDR ETF has paid $0.81 per share over the trailing 12 months, which on its recent ~$56.75 share price works out to a 1.40% yield.
The ProShares – Ultra Financials (NYSEMKT:UYG) targets daily investment returns that are double the daily fluctuations of the S&P Financial Select Sector Index. Its largest positions include JPMorgan Chase at 6.78%, Berkshire Hathaway at 6.67%, and ProShares Genius Money Market ETF (NYSEMKT:IQMM) at 4.86%. Similar to its peer, it allocates 98% to financial services and 2% to technology. It holds 84 positions and carries a daily leverage reset quirk. The fund was launched in 2007. ProShares – Ultra Financials has paid $10.67 per share over the trailing 12 months, which on its recent ~$95.19 share price works out to an 11.50% yield.
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What this means for investors
Most ETFs are designed for patient, long-term investors. UYG is not. This is a leveraged fund that uses derivatives to deliver twice the daily return of the financial sector index. If financials rise 2% on a given day, UYG aims to gain 4%. The reverse is equally true and equally painful.
The critical word is daily. UYG resets its leverage every single day, which means returns over weeks or months can diverge sharply from what simple math suggests. In choppy or volatile markets, that daily reset erodes value even when the underlying index ends the period roughly flat, a phenomenon known as volatility decay. UYG’s 52-week range swung from $63 to $104, a dramatic illustration of what leverage does to volatility.
XLF is the straightforward alternative here. It tracks the same financial sector index at a fraction of the cost, without leverage, without daily resets, and without the complexity that makes UYG appropriate only for sophisticated short-term traders. For long-term investors who want financial sector exposure, XLF is the clear and sensible choice. UYG is a tool, not an investment, and should be treated accordingly.
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JPMorgan Chase is an advertising partner of Motley Fool Money. Sara Appino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, JPMorgan Chase, and Visa. The Motley Fool has a disclosure policy.
State Street’s XLF or ProShares’ UYG: Which Financial ETF Is Right for Long-Term Investors? was originally published by The Motley Fool
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