State Street Technology ETF vs iShares Technology ETF

Comparing State Street Technology Select Sector SPDR ETF (NYSEMKT:XLK) against iShares U.S. Technology ETF (NYSEMKT:IYW) reveals a significant gap in expense ratios and a choice between 78 or 154 holdings.

Both funds offer heavy exposure to the dominant players in the U.S. technology sector, serving as foundational tools for investors seeking long-term growth. While they share several top holdings, the differences in their tracking indexes -- one following a capped Russell 1000 index and the other focusing strictly on S&P 500 technology components -- result in varying levels of concentration. With billions of dollars in assets under management (AUM), these ETFs provide highly liquid access to the engines of the modern economy.

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

The State Street fund is considerably more affordable, with an expense ratio of 0.08%, significantly lower than the 0.37% fee charged by the iShares fund. For investors with significant capital, this 0.29 percentage point gap can lead to substantial differences in net performance over several decades. Furthermore, the State Street fund currently offers a higher payout to shareholders, with a yield gap of 0.32 percentage points compared to the iShares fund yield.

Performance & risk comparison

State Street Technology Select Sector SPDR ETF replicates the performance of the Technology Select Sector Index, providing concentrated exposure by holding 78 stocks in a portfolio that is 100% focused on technology. Its largest positions include Nvidia(NASDAQ:NVDA) at 15.5%, Apple(NASDAQ:AAPL) at 13.4%, and Microsoft(NASDAQ:MSFT) at 10.5%. Launched in 1998, it is a staple for those seeking pure-play exposure to the largest tech firms in the S&P 500. State Street Technology Select Sector SPDR ETF has paid $0.83 per share over the trailing 12 months, which, on its recent $202.50 share price, works out to a 0.4% yield.

The iShares U.S. Technology ETF tracks the Russell 1000 Technology RIC 22.5/45 Capped Index, which results in a broader reach of 154 holdings and a different weighting scheme. While its sector breakdown is not reported, its largest holdings include Nvidia at 17.2%, Apple at 15.2%, and Microsoft at 12.1%. It was launched in 2000 and provides exposure across the Russell 1000 index, capping larger positions to manage concentration risk. iShares U.S. Technology ETF has paid $0.25 per share over the trailing 12 months, which, on its recent $273.30 share price, works out to a 0.1% yield.

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Which looks like the better buy

I'm looking at two veterans here. The iShares fund was launched in the spring of 2000, 17 months after the SPDR ETF.

On total returns, these funds are close to interchangeable. XLK posted annualized total returns of 21.9% over the past five years, compared with 21.1% for IYW. Over 10 years, IYW comes out slightly ahead, 25.5% to 25.1%. Measured back to IYW's 2000 launch, dividend-adjusted gains come to roughly 1,100% for XLK and 1,050% for IYW. All of these long-term matchups are essentially ties.

With returns that close, the tiebreakers decide it, and XLK wins nearly all of those for me.

• Cost is where the funds really separate. XLK charges 0.08% a year, or $8 per $10,000 invested; IYW charges 0.37%, or $37.
• XLK also yields 0.41% versus 0.09% for IYW, and much of that gap can be traced to fees, since expenses are deducted from dividend payouts.
• XLK is also far larger, with $131.1 billion in assets compared with IYW's $27.2 billion. As a result, the SPDR giant is slightly less volatile in the long run.

The one thing XLK lacks is Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) and Meta Platforms (NASDAQ:META), which the S&P index's sector rules moved out of tech in 2018. These Magnificent 7 stocks are technically Communication Services in this system. They belong to a different State Street ETF, namely the State Street Communication Services Select Sector SPDR ETF (NYSEMKT:XLC).

You may see that as a benefit or a drawback for the XLK fund, depending on how heavily you want to focus on the AI boom. Anyone holding an S&P 500 index fund already owns both companies, and XLK avoids doubling up on them. That's another tiny benefit in my book.

Anders Bylund has positions in Alphabet and Nvidia. The Motley Fool has positions in and recommends Alphabet, Apple, Meta Platforms, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.