Reconsidering Exposure to the iShares MSCI Europe Financials ETF (EUFN): Concentration Risk and Suboptimal Performance

Investors seeking exposure to the financial sector often turn to exchange-traded funds (ETFs) for diversification and cost efficiency. However, the iShares MSCI Europe Financials ETF (EUFN) warrants closer scrutiny due to its concentration risk, elevated expense ratio, and suboptimal performance relative to lower-cost alternatives like the Financial Select Sector SPDR ETF (XLF) and Vanguard Financials ETF (VFH).

Concentration Risk: Overexposure to HSBC Holdings PLC

EUFN’s portfolio is heavily weighted toward HSBC Holdings PLC, a single holding that accounts for 7.44% to 7.70% of the ETF’s total assets as of July–September 2025 [1][2]. This concentration exposes investors to idiosyncratic risks tied to HSBC’s performance, including regulatory challenges, geopolitical volatility in its Asian operations, and macroeconomic shifts in European banking. For context, the top 10 holdings in EUFN represent 41.4% of total assets, with HSBC being the largest component [3]. Such a structure contrasts sharply with more diversified financial ETFs like XLF and VFH, which spread risk across broader U.S. financial sectors.

The MSCI Europe Financials Index, which EUFN tracks, is designed to reflect large- and mid-cap European financial institutions but remains susceptible to sector-specific downturns. For instance, a regulatory crackdown on European banks or a liquidity crisis in the region could disproportionately impact EUFN compared to geographically diversified alternatives.

Elevated Expense Ratio and Poor Zacks ETF Rank

EUFN’s 0.48% expense ratio [4] is significantly higher than XLF’s 0.08% and VFH’s 0.09% [5]. While this difference may seem minor, it compounds over time, eroding long-term returns. For example, an investor allocating €1 million to EUFN would incur €4,800 in annual fees, compared to €800 for XLF and €900 for VFH. These costs become critical in a sector historically prone to volatility, where active management and lower fees can enhance risk-adjusted returns.

Compounding the issue, EUFN holds a Zacks ETF Rank of 4 ("Hold") as of September 2025 [6], indicating limited upside potential relative to its peers. In contrast, XLF and VFH are ranked 1 ("Strong Buy") and 2 ("Buy"), respectively [5][7], reflecting superior momentum, expense efficiency, and alignment with favorable market conditions. This ranking disparity underscores EUFN’s structural disadvantages, including its higher cost base and geographic concentration.

Suboptimal Performance Despite Strong Returns

While EUFN has delivered a 48.81% 1-year return and 36.09% 3-year return as of July–September 2025 [8], these figures must be contextualized. The ETF’s performance is driven by the aggressive recovery of European financials, particularly HSBC’s rebound from pandemic-era losses. However, this outperformance comes at a cost: EUFN’s returns trail XLF’s 21.41% 1-year return and 17.86% 3-year return [9], and VFH’s 12.42% 1-year return and 12.38% 3-year return [10] when adjusted for fees.

The discrepancy highlights a critical trade-off. XLF and VFH, which focus on U.S. financials, benefit from lower expenses and a more resilient regulatory environment. Meanwhile, EUFN’s exposure to European markets—where banking sectors face stricter capital requirements and slower digital transformation—introduces headwinds that could dampen future growth.

Strategic Implications for Investors

For investors prioritizing cost efficiency and balanced risk profiles, EUFN’s structural flaws outweigh its recent performance. The ETF’s heavy reliance on HSBC, coupled with its elevated expense ratio and middling Zacks rank, makes it a less compelling choice compared to XLF and VFH. These alternatives not only offer lower fees but also provide exposure to more dynamic financial markets, particularly in the U.S., where innovation and regulatory clarity favor long-term growth.

In conclusion, while EUFN may appeal to those seeking European financial exposure, its concentration risk and cost inefficiency make it a suboptimal core holding. Investors are advised to rebalance their portfolios toward lower-cost, better-ranked alternatives to optimize risk-adjusted returns in an increasingly competitive ETF landscape.

Source:
[1] iShares MSCI Europe Financials ETF (EUFN) - Yahoo Finance
https://finance.yahoo.com/quote/EUFN/
[2] EUFN,SPG Short Interest - Finviz
https://finviz.com/quote.ashx?p=m&r=max&t=EUFN%2CSPG&ta=0&tt=tt-table&ty=si
[3] EUFN iShares MSCI Europe Financials ETF - ETFdb
https://etfdb.com/etf/EUFN/
[4] iShares MSCI Europe Financials ETF | EUFN - BlackRock
https://www.blackrock.com/ae/intermediaries/products/239645/ishares-msci-europe-financials-etf
[5] Should You Invest in the Financial Select Sector SPDR ETF - Zacks
https://www.zacks.com/stock/news/2505848/should-you-invest-in-the-vanguard-financials-etf-vfh
[6] Should You Invest in the iShares MSCI Europe Financials ETF - Zacks
https://www.zacks.com/stock/news/2570613/should-you-invest-in-the-ishares-msci-europe-financials-etf-eufn
[7] Should You Invest in the Vanguard Financials ETF (VFH)? - Zacks
https://www.zacks.com/stock/news/2505848/should-you-invest-in-the-vanguard-financials-etf-vfh
[8] iShares MSCI Europe Financials ETF (EUFN) Performance - Yahoo Finance
https://finance.yahoo.com/quote/EUFN/performance/
[9] XLF: The Financial Select Sector SPDR® Fund - State Street
https://www.ssga.com/us/en/intermediary/etfs/the-financial-select-sector-spdr-fund-xlf
[10] VFH Index Financials ETF - Vanguard Advisors
https://advisors.vanguard.com/investments/products/vfh/vanguard-financials-etf?CMPGN=EX%3APS%3AFAS%3ASustaining