Which Is the Better Tech ETF, Vanguard's VGT or State Street's XLK?

The State Street Technology Select Sector SPDR ETF (NYSEMKT:XLK) offers a concentrated, low-cost play on S&P 500 tech, while the Vanguard Information Technology ETF (NYSEMKT:VGT) provides broader exposure.

Both funds serve as core pillars for investors seeking aggressive growth through the information technology sector. While the State Street fund focuses exclusively on large-cap technology stocks within the S&P 500, the Vanguard fund casts a wider net across the broader U.S. equity market, including small- and mid-cap companies. This difference in scope influences everything from diversification to dividend output.

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.

The State Street fund is slightly more affordable with an expense ratio of 0.08%. However, the Vanguard fund has higher assets under management of $121.3 billion.

Performance & risk comparison

What's inside

The Vanguard fund is a broad-market fund that includes 310 holdings, providing exposure to 98% technology, 1% industrials, and 1% other assets. Its largest positions include Nvidia (NASDAQ:NVDA) at 18.47%, Apple (NASDAQ:AAPL) at 15.80%, and Microsoft (NASDAQ:MSFT) at 10.17%. This fund was launched in 2004 and has a trailing-12-month dividend of $2.41 per share, reflecting its inclusion of various market-cap sizes within the electronics and computer industries.

In contrast, the State Street fund is more concentrated with 73 holdings and was launched in 1998. It focuses on large-cap stocks from the S&P 500, and its top holdings include Nvidia at 15.42%, Apple at 12.37%, and Microsoft at 9.98%. This fund is 99% technology and has paid $0.76 per share over the trailing 12 months. While it tracks a narrower index, the concentration in top-tier large caps has contributed to its higher 5-year growth profile.

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What this means for investors

Investors seeking exposure to the hot tech industry, particularly with the rise of artificial intelligence, may find the State Street Technology Select Sector SPDR ETF (XLK) and the Vanguard Information Technology ETF (VGT) appealing choices. Which one is the better investment depends on your individual goals.

XLK sports a stronger one-year return, smaller max drawdown, higher dividend yield, and all of that for a lower expense ratio. These factors seem to make it the superior ETF compared to VGT.

However, XLK has only 73 holdings. Granted, these are some of the largest tech stocks in the the S&P 500, but what this means is that the fund’s performance is highly dependent on how big names, such as Nvidia, fare.

That said, XLK is an efficient way to gain exposure to big names in tech. If you don’t already own shares in these companies, XLK is a good ETF to choose.

VGT’s far broader tech holdings of more than 300 companies grants diversification, which provides exposure to smaller tech businesses that you don’t get with XLK. These smaller companies have the potential to deliver outsized share price gains as their operations grow.

Moreover, VGT has a lower stock price after the fund performed an 8-for-1 share split in April. This ETF is for investors who want to gain exposure to a broad range of tech companies, particularly small- and mid-cap enterprises that are seeing rapid expansion thanks to AI.

Robert Izquierdo has positions in Apple, Microsoft, and Nvidia. The Motley Fool has positions in and recommends Apple, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.