XLK vs. IYW: Which is the Better Choice for Tech-Focused Investors?

The State Street Technology Select Sector SPDR ETF (NYSEMKT:XLK) stands out for its lower costs and slightly higher yield, while the iShares US Technology ETF (NYSEMKT:IYW) offers broader exposure across more holdings and a minor sector tilt.

Both XLK and IYW aim to capture the performance of U.S. technology stocks, but they take slightly different approaches. XLK focuses on the S&P 500's technology sector, offering a highly liquid, streamlined portfolio, while IYW casts a slightly wider net with additional exposure to communication services and a greater number of holdings. Here is a side-by-side look at how they compare.

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 looks more affordable for long-term investors, with an expense ratio just 0.08% compared to IYW’s 0.38%. XLK also offers a modestly higher dividend yield, which may appeal to those seeking some income from tech holdings.

Performance & Risk Comparison

What's Inside

XLK delivers targeted exposure to the S&P 500’s technology sector, holding 72 stocks with a heavy emphasis on industry giants. As of its 27th year, top positions include Nvidia (NASDAQ:NVDA) at 13.71%, Apple (NASDAQ:AAPL) at 12.82%, and Microsoft (NASDAQ:MSFT) at 11.16%. The fund is tightly focused on technology (99%) and excludes meaningful allocations to other sectors.

IYW, by contrast, holds 142 stocks and introduces a slight tilt toward communication services and industrials alongside its core technology exposure. Its top holdings are Nvidia at 15.46%, Apple at 15.42%, and Microsoft at 13.44%, but its broader roster may appeal to those seeking a bit more diversification within tech. Neither fund layers in leverage, currency hedging, or ESG screens.

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What This Means For Investors

To begin, it's important to note how similar these two funds are. Both the State Street Technology Select Sector SPDR ETF (XLK) and the iShares US Technology ETF (IYW) focus on the same sector and have many of the same holdings. Moreover, their respective performance over the last five years is nearly identical.

Yet, there are some key differences between these two funds. For example, when it comes to fees, the XLK boasts a lower expense ratio of 0.08%, while the IYW's expense ratio is 0.38%. For someone who invests $10,000 in each fund, the IYW will cost about $38 per year in fees, while the XLK will cost only $8. Granted, that's not a huge amount, but it does add up.

In addition, the XLK has a higher dividend yield of 0.5%, as opposed to only 0.1% for the IYW. Neither yield is all that attractive for income-seeking investors, but, once again, dividend yield is another point in the column for XLK.

Finally, there's Assets Under Management (AUM). AUM matters for ETF investors because it's a key measure of liquidity -- demonstrating how easy it is for an investor to liquidate their shares. Both funds have ample AUM of $21 billion and $96 billion, respectively. In turn, investors shouldn't have any concerns with liquidity.

To sum up, these two funds have more similarities than differences, and tech-focused investors would be wise to consider both funds. That said, XLK's lower expense ratio and higher dividend yield may tip the scales in its favor for cost-conscious investors.

Glossary

Expense ratio: The annual fee, as a percentage of assets, that an ETF charges to cover operating costs.
Dividend yield: The annual dividends paid by an ETF, expressed as a percentage of its share price.
ETF (Exchange-Traded Fund): An investment fund traded on stock exchanges, holding a basket of assets like stocks or bonds.
Drawdown: The maximum decline from a fund’s peak value to its lowest point over a specific period.
Beta: A measure of an investment’s volatility compared to the overall market, typically the S&P 500.
AUM (Assets Under Management): The total market value of assets that a fund manages on behalf of investors.
S&P 500: A stock market index tracking the 500 largest publicly traded U.S. companies.
Sector tilt: An ETF’s intentional overweight or underweight exposure to specific industry sectors compared to a benchmark.
Leverage: The use of borrowed money to increase the potential return of an investment.
Currency hedging: A strategy to reduce the impact of currency fluctuations on investment returns.
ESG screens: Criteria used to include or exclude investments based on environmental, social, and governance factors.

Jake Lerch has positions in Nvidia. The Motley Fool has positions in and recommends Apple, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.