CHAT vs. XLK: Leaning Into AI’s Next Phase or Anchoring in Mega-Cap Tech

The Roundhill Investments - Generative AI & Technology ETF (CHAT) stands out for its active focus on generative artificial intelligence, while the State Street Technology Select Sector SPDR ETF (XLK) offers broad, index-based exposure to the U.S. technology sector at a much lower cost.

Both CHAT and XLK target technology trends, but take very different approaches: CHAT is actively managed with a focus on companies advancing generative AI, and XLK tracks the S&P 500’s technology sector. Investors comparing these funds may want to weigh cost, sector purity, and recent performance.

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 is far more affordable with a 0.08% expense ratio, while CHAT’s active strategy comes at a higher 0.75% fee. XLK’s massive assets under management (AUM) also support deeper liquidity and tighter trading spreads.

Performance & risk comparison

What's inside

XLK holds about 70 companies and aims for comprehensive coverage of the S&P 500’s technology sector, with 99% of assets in tech and negligible exposure elsewhere. Its top positions—Nvidia (NASDAQ: NVDA), Apple (NASDAQ: AAPL), and Microsoft (NASDAQ: MSFT)—dominate the portfolio, reflecting the sector’s concentration. With a 27-year track record, XLK is among the most established tech ETFs and avoids sector or ESG overlays.

By contrast, CHAT is a much newer, actively managed fund investing in 52 stocks across technology (83%), communication services (11%), and consumer cyclicals (6%). Its largest holdings include Alphabet (NASDAQ: GOOGL), Nvidia, and Microsoft. CHAT’s ESG screen may appeal to those seeking responsible investing within the generative AI theme, but it results in less sector purity compared to XLK.

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What this means for investors

The comparison between CHAT and XLK highlights two very different approaches to artificial intelligence exposure. XLK mirrors the technology sector inside the S&P 500, tying results to the largest and most established companies in the market. CHAT takes an active approach, concentrating on firms more directly involved in generative AI development and adoption. That design leaves CHAT more exposed to how quickly AI spending translates into durable business results.

The contrast shows up in how each fund generates returns. XLK’s performance is driven by a small group of mega-cap leaders whose earnings already account for a large share of index returns. CHAT holds several of those same companies, but it also reaches beyond traditional technology into adjacent areas where AI adoption is still taking shape. That flexibility introduces more variability. It also increases dependence on manager judgment and raises the bar for justifying higher fees.

For investors, the decision is about portfolio structure rather than enthusiasm for AI. XLK anchors exposure to companies already capturing the bulk of technology profits. CHAT represents a more forward-looking position, built around the possibility that generative AI reshapes leadership over time. The distinction lies in whether an investor wants returns aligned with today’s market structure or exposure designed to follow where AI-driven value may emerge next.

Glossary

Expense ratio: The annual fee, as a percentage of assets, that an ETF or mutual fund charges investors.
Actively managed: A fund where managers select investments, aiming to outperform a benchmark, rather than tracking an index.
Index tracker: A fund designed to replicate the performance of a specific market index.
Liquidity: How easily an asset can be bought or sold in the market without affecting its price.
S&P 500: A major stock market index tracking 500 large U.S. companies across various industries.
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.
Drawdown: The maximum observed loss from a fund's peak value to its lowest point over a specific period.
ESG screen: A filter that includes or excludes investments based on environmental, social, and governance criteria.
Sector purity: The extent to which a fund invests only in its targeted sector, with minimal exposure elsewhere.
Consumer cyclicals: Companies whose business performance is closely tied to economic cycles, such as retail or travel.
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.