Financials or Tech: Is XLF or FTEC the Better Buy?

The State Street Financial Select Sector SPDR ETF (NYSEMKT:XLF) offers lower volatility and higher income by focusing on the financial sector, while the Fidelity MSCI Information Technology Index ETF (NYSEMKT:FTEC) provides high-growth tech exposure.

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-year return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield.

Both funds are inexpensive, with identical expense ratios of 0.08%. However, XLF pays a higher dividend yield of 1.42%, more than a full percentage point above FTEC’s 0.37%. Technology companies tend to reinvest cash into growth rather than return it to shareholders, and the yield gap reflects that.

Performance & risk comparison

FTEC has returned 39.3% over the past year and has outpaced XLF over the past five years as well. That outperformance came with more turbulence, though: FTEC’s worst peak-to-trough decline over the period was deeper than XLF’s. XLF has a beta that’s roughly half of FTEC’s, which means it experiences lower overall volatility -- which is what many income-oriented investors are after.

What's inside

Launched in 1998, XLF holds 76 stocks and offers targeted exposure to financial sub-sectors, including banking, insurance, and capital markets. Its largest positions are JPMorgan Chase + Co (NYSE:JPM) at 11.7%, Berkshire Hathaway Inc (NYSE:BRKB) at 11.7%, and Visa Inc (NYSE:V) at 7.6%.

FTEC focuses on the technology sector, including software and semiconductor companies, and holds 285 stocks. Its largest positions are Apple Inc (NASDAQ:AAPL) at 17.4%, Nvidia Corp (NASDAQ:NVDA) at 16.5%, and Microsoft Corp (NASDAQ:MSFT) at 10.6%. FTEC was launched in 2013.

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Which looks like the better buy

Let’s start with the obvious. This is an apples-to-oranges comparison.

XLF and FTEC aren't rivals the way two S&P 500 funds or two funds in the same sector are. These two funds own essentially no stocks in common, and it’s unlikely an investor would actually need to choose between them. The more useful question isn't which fund is better, it's whether a portfolio needs more of either.

For most people, the answer is probably not much more. Technology and financials are the two biggest slices of the S&P 500, so anyone holding a plain index fund already owns each of these funds’ largest positions: Nvidia, Apple, Microsoft, JPMorgan Chase, and Berkshire Hathaway. For these investors, adding a sector ETF isn't diversification -- it's a decision to lean harder in one direction.

Here's one wrinkle worth noting: FTEC holds 294 stocks and XLF holds 76, yet FTEC is the more concentrated of the two. Nvidia, Apple, and Microsoft alone account for nearly 45% of FTEC's assets, versus about 31% for XLF's top three. In this case, buying the fund with the larger number of holdings still means making a very large bet on three companies.

The performance gap between these ETFs is also fairly typical of how these two sectors behave. Tech tends to lead in bull markets and fall hardest when sentiment turns, and FTEC's deeper 5-year maximum drawdown is the price of admission for a chance at the kind of stellar returns it’s delivered over the past year. Financial ETFs tend to move less dramatically, with their fortunes tied to interest rates, loan demand, and credit conditions more than product cycles.

So, who is each fund really designed for? FTEC suits an investor with a long runway and the stomach for a steep drop -- someone who wants to deliberately overweight AI and semiconductors, and who won't panic when tech has one of its rough years. XLF fits an investor who wants less “excitement” from their investments, including lower volatility and a higher dividend yield -- which often means someone closer to retirement. And investors who are just getting started are probably better served by a broad index fund than by either.

JPMorgan Chase is an advertising partner of Motley Fool Money. Andy Gould has positions in Apple, Berkshire Hathaway, Nvidia, and Visa and has the following options: long January 2027 $125 calls on Nvidia, short August 2026 $355 calls on Apple, and short January 2027 $125 puts on Nvidia. The Motley Fool has positions in and recommends Apple, Berkshire Hathaway, JPMorgan Chase, Microsoft, Nvidia, and Visa. The Motley Fool has a disclosure policy.