XLK vs. IYW: Focused Tech Exposure or Broader Reach

• XLK carries a much lower expense ratio and higher yield than IYW
• IYW has slightly outpaced XLK in recent performance and offers broader exposure to communication services stocks
• XLK is much larger and more liquid, with a more concentrated focus on technology sector leaders

The iShares US Technology ETF (NYSEMKT:IYW) and The Technology Select Sector SPDR Fund (NYSEMKT:XLK) differ most in cost, yield, and portfolio concentration, with XLK offering lower fees and a more focused approach, while IYW provides broader sector exposure.

Both the iShares US Technology ETF (NYSEMKT:IYW) and The Technology Select Sector SPDR Fund (NYSEMKT:XLK) target the U.S. technology sector.

XLK tracks a concentrated slice of the S&P 500’s tech leaders, while IYW includes more communication services and a larger number of holdings.

Investors comparing these funds may want to weigh differences in fees, diversification, and trading characteristics.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; beta is calculated from five-year weekly returns. The 1-yr return represents total return over the trailing 12 months.

XLK stands out for its much lower expense ratio, making it more affordable for cost-conscious investors. It also offers a higher yield, which may appeal to those looking for a modest income boost from their tech allocation.

Performance & risk comparison

What's inside

The Technology Select Sector SPDR Fund holds 69 companies, focusing almost exclusively on technology (98%) with minimal exposure elsewhere. Top positions include Nvidia (NASDAQ:NVDA), Apple (NASDAQ:AAPL), and Microsoft (NASDAQ:MSFT), each representing a significant portion of assets. With over 26 years of history and nearly $93 billion in assets under management (AUM), XLK offers highly liquid, blue-chip tech exposure.

In contrast, the iShares US Technology ETF holds 141 stocks, spreading exposure more broadly across technology (89%), communication services (9%), and a small slice of consumer cyclical. Its top holdings mirror XLK’s, but IYW’s broader sector allocation and larger roster may appeal to those seeking slightly more diversification within the U.S. tech universe.

For more guidance on ETF investing, check out the full guide at this link.

Foolish take

When you look at XLK and IYW side by side, it’s clear they aim to do the same job: give investors exposure to the leaders of America’s technology sector. They hold many of the same mega-cap names and have delivered similar long-term growth patterns. Yet, they take two distinct approaches to building that exposure, and that’s where the fundamental differences start to matter for investors.

XLK takes a more concentrated approach and does so at a significantly lower cost, a combination that can be beneficial for investors seeking a straightforward and long-term tech allocation. IYW, on the other hand, casts a wider net. It includes a broader mix of technology and communication-services companies and holds more than twice as many stocks as XLK. That added breadth has contributed to slightly stronger recent performance, though it comes with a higher expense ratio and a smaller asset base. For investors who prefer a more diversified slice of the tech ecosystem and are willing to pay more for it, IYW offers a reasonable alternative.

For investors, the choice between the two ultimately depends on what you want your tech exposure to accomplish. If you prefer a fund that channels most of its weight into the largest and most stable tech companies, XLK aligns with that approach and does so at a lower ongoing cost. Suppose you believe diversification within tech can reduce portfolio risk or capture opportunities beyond the mega-cap leaders. In that case, IYW offers a broader range of holdings and a more extensive sector footprint.

Both funds serve the same purpose, and the better choice is simply the one that fits the role you want technology to play in your portfolio.

Glossary

Expense ratio: The annual fee, expressed as a percentage of assets, that a fund charges to cover operating costs.
Dividend yield: The annual dividends paid by a fund, shown as a percentage of its current price.
Beta: A measure of a fund's volatility compared to the overall market; higher than 1 means more volatile.
Assets under management (AUM): The total market value of all assets managed by a fund.
Max drawdown: The largest percentage drop from a fund's peak value to its lowest point over a specific period.
Liquidity: How easily and quickly a fund or asset can be bought or sold without affecting its price.
Portfolio concentration: The degree to which a fund's assets are invested in a small number of holdings or sectors.
Sector exposure: The proportion of a fund's assets allocated to specific industries or sectors.
Holdings: The individual stocks or securities owned within a fund or portfolio.
Total return: The investment's price change plus all dividends and distributions, assuming those payouts are reinvested.

Eric Trie has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.