This ETF Caught a Major Tailwind After the Fed's Rate Cut

After finishing 2024 with the third-best performance of the S&P 500’s 100 sectors, the financial sector is wrapping up 2025 with strong momentum that could carry into 2026.

Over the past month, the sector has risen 4.18%. And after the Federal Reserve enacted its third and final interest rate cut of the year, the banks, insurance companies, credit services, fintech firms and payment processors who call the financials sector home are well-positioned for a strong start to 2026. 

For investors who are looking to gain broad exposure, the Vanguard Financials ETF (NYSEARCA:VFH) is an all-in-one fund that warrants attention. 

Rate Cuts and the Market’s Rotation Are Bullish for Financials

Overall, the financials sector has marginally trailed the S&P 500 this year, with gains of nearly 13% and more than 14%, respectively. 

But with a gap of less than two percentage points, financials have proven to be resilient, even as investors poured funds into the tech and communication services sectors, which together are home to the Magnificent Seven, as well as pure-play AI stocks. 

But as the market rotation has picked up steam after valuation and AI bubble concerns came to a head in late October, financials has been a cyclical beneficiary. 

On Dec. 17, billionaire hedge fund manager Ronald Baron said on CNBC’s “ETF Edge” that investors should be looking across more market caps and sectors for the best opportunities, and that includes a rotation out of tech and into value, which can be found in the financials sector. 

“There are so many companies that are interesting right now with everyone focusing on technology,” Baron said. And after the Federal Reserve cut interest rates at its December Federal Open Market Committee (FOMC) meeting, many of those companies now fall into financials. 

That sector will see outsized benefits from increased lending as a result of lower rates and subsequently cheaper borrowing costs. Although steeper cuts can compress net interest margins, higher loan volumes can offset that, improving profitability.

That is something that’s likely to play out over the coming quarters as interest rates fall in response to the Fed’s third and final rate cut of 2025. Annual percentage yields (APYs) on banking products, including cash equivalents like high-yield savings accounts, money market accounts, and certificates of deposit, have already decreased since the Fed’s FOMC meeting, which concluded on Dec. 10. 

Another reason the Fed’s rate cuts are bullish for financials is that they translate into reduced default levels. Lower rates equate to cheaper, less burdensome debt, which in turn lowers delinquency rates for financial institutions.

VFH: Breaking Down the Fund

The Vanguard Financials ETF is well-diversified, with a broad representation of various industries. Companies that fall into banking (28.1%), capital markets (24.5%), insurance (21%), and diversified financial services (15.9%) account for the lion’s share of the fund’s weighting. 

That results in fairly balanced allocations, with the ETF’s top 10 holdings including: JPMorgan Chase (NYSE: JPM), Berkshire Hathaway (NYSE: BRK), Mastercard (NYSE: MA), Bank of America (NYSE: BAC), Visa (NYSE: V), Wells Fargo (NYSE: WFC), Goldman Sachs (NYSE: GS), American Express (NYSE: AXP), Morgan Stanley (NYSE: MS), and Citigroup (NYSE: C).

If that wasn’t enough, Charles Schwab (NYSE: SCHW), BlackRock (BLK), and Blackstone (NYSE: BX) fall just outside of those aforementioned financial behemoths.

The VFH’s net expense ratio is just 0.09%, which is entirely offset by its dividend yield of 1.54%, or $2.05 per share annually. The fund has $13.36 billion in assets under management, and based on 493 analyst ratings of the 24 companies in its portfolio, the ETF receives an aggregate Moderate Buy rating.

What Wall Street Thinks About the VFH for 2026

The smart money has positioned itself for more gains out of the Vanguard Financials ETF, as evidenced by institutional owners pumping $1.42 billion of inflows into the fund over the past 12 months versus just $715 million in outflows. 

However, perhaps most telling is the distance that Wall Street’s bears are keeping from the fund. Current short interest for the VFH stands at a minute 0.37%, or just 375,011 shares.

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The article "This ETF Caught a Major Tailwind After the Fed’s Rate Cut" first appeared on MarketBeat.