Tech Sector Showdown: The Trade-Off Between Tactical Concentration and Low-Cost Breadth

iShares Semiconductor ETF (NASDAQ:SOXX) offers concentrated exposure to the semiconductor industry, while Vanguard Information Technology ETF (NYSEMKT:VGT) provides broader tech sector coverage with a significantly lower expense ratio.

Both funds provide access to the high-growth technology sector but cater to different strategies. While one casts a wide net across hardware and software, the other zooms in on the processors powering artificial intelligence and modern computing, resulting in distinct volatility and performance profiles.

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.

VGT is the more affordable option with a 0.09% expense ratio, while SOXX charges a higher 0.33% fee. VGT also offers a slightly higher payout, with a yield of 0.4% compared to 0.3% for SOXX.

Performance & risk comparison

What's inside

iShares Semiconductor ETF focuses exclusively on the semiconductor industry, with 100% of its holdings in technology. It is a concentrated portfolio of 30 holdings that includes manufacturers of electronic materials and equipment providers. Its largest positions include Advanced Micro Devices (NASDAQ:AMD) at 9.32%, Intel (NASDAQ:INTC) at 8.25%, and Nvidia (NASDAQ:NVDA) at 8.11%. The fund was launched in 2001. iShares Semiconductor ETF has paid $1.25 per share over the trailing 12 months, which, on its recent ~$478.20 share price, works out to a 0.3% yield.

Vanguard Information Technology ETF provides broader exposure, with its sector makeup including Technology 99%, Financial Services 0%, and Industrials 0%. It employs a full-replication strategy to track its index, which includes businesses that support the electronics and computer sectors. Its largest positions include Nvidia at 17.59%, Apple (NASDAQ:AAPL) at 15.92%, and Microsoft (NASDAQ:MSFT) at 11.16% among its 310 holdings. The fund was launched in 2004. Vanguard Information Technology ETF has paid $0.47 per share over the trailing 12 months, which, on its recent ~$119.17 share price, works out to a 0.4% yield.

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Which looks like the better buy

When comparing the iShares Semiconductor ETF (SOXX) and the Vanguard Information Technology ETF (VGT), investors should consider several key factors. Let's see what they tell us about each fund.

First, we should examine each fund's strategy. For its part, SOXX is a concentrated semiconductor-focused fund. It holds about 30 stocks, all of which are connected to the semiconductor subsector. VGT, on the other hand, casts a wider net. It holds stocks from across the tech sector, about 320 in total, and its top holding list is dominated by big tech stocks like Apple, Microsoft, and Nvidia.

Two other important factors are historical performance and income potential. As for performance, SOXX has generated a total return of 237% over the last five years, equating to a compound annual growth rate (CAGR) of 27.5%. VGT, by contrast, has delivered a total return of 133%, with a 18.4% CAGR. Turning to income potential, neither fund boasts a large dividend yield. SOXX's dividend yield is 0.3%, and VGT's is 0.4%.

One final factor to weigh is cost. Here, VGT has an edge. Its annual expense ratio is 0.09%, while SOXX's is 0.33%. For context, a person who invests $10,000 in each fund should expect to pay $9 per year in fees for their VGT shares and $33 per year in fees for their SOXX shares.

In summary, SOXX and VGT both hold tech stocks, but their strategies, historical performance, and costs truly differ. SOXX is best for investors seeking concentrated exposure to the semiconductor subsector or those willing to endure more volatility in the tech sector. VGT's low expense ratio will appeal to cost-conscious investors, while its broader strategy may appeal to those seeking tech exposure without being overly concentrated in the semiconductor subsector.

Jake Lerch has positions in Nvidia and Vanguard Information Technology ETF. The Motley Fool has positions in and recommends Advanced Micro Devices, Apple, Intel, Microsoft, Nvidia, and iShares Trust - iShares Semiconductor ETF. The Motley Fool has a disclosure policy.