Morningstar Rating

ETF Research and Analysis

by Robert Goldsborough
Suitability
Vanguard Financials ETF VFH provides broad exposure to the U.S. financial-services sector. Unlike many other U.S. equity sectors, the financial-services sector has not returned to its precrisis highs. The reasons for this   Read more 

Bull Case

VFH offers comprehensive coverage of the U.S. financials sector, which mitigates company-specific risk. It also is tied for having the lowest expense ratio of any major financial-services ETF.
Despite net interest-margin pressure in the short term, over the longer term, higher interest rates should help U.S. banks.
Banks are in general better capitalized than in the past, and capital ratios have been improving. Banks also have done a fine job cutting expenses. Read more 

Bear Case

Morningstar's equity analysts hold the view that interest-spread revenue at banks won't grow until interest rates rise, but even then, when rates do rise, net interest margins are expected to rise more slowly than rates themselves, as higher-yielding assets will be added as lower-yielding ones fall off.
If interest rates rise, that could hamper underwriting activity at investment banks.
European sovereign debt problems could cascade across the Atlantic and force the U.S. banking system to absorb some losses. Read more 

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