Which is the Better Tech ETF?

The State Street Technology Select Sector SPDR ETF (NYSEMKT:XLK) and iShares Semiconductor ETF (NASDAQ:SOXX) differ most in cost, performance, and concentration: SOXX charges higher fees and is more volatile, but recently outperformed and offers a pure-play semiconductor portfolio, while XLK is cheaper, larger, and covers the broader tech space.

Both XLK and SOXX target the technology sector, but approach it from different angles. XLK tracks the S&P 500’s technology slice, giving exposure to a wide tech mix, while SOXX zeroes in on U.S.-listed semiconductor companies.

Snapshot (cost & size)

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

SOXX charges a significantly higher expense ratio than XLK, which may matter for fee-conscious investors. XLK’s yield is marginally higher, though both funds offer only modest payouts by broader equity standards.

Performance & risk comparison

What's inside

SOXX focuses exclusively on U.S.-listed semiconductor companies, offering investors a concentrated basket of 30 holdings. Its largest positions are Micron Technology Inc (NASDAQ:MU), Nvidia Corp (NASDAQ:NVDA), and Applied Material Inc (NASDAQ:AMAT), together accounting for more than 23% of the fund. The ETF is 24.7 years old, and its pure-play approach means performance is closely tied to the semiconductor industry’s fortunes.

XLK, by contrast, gives exposure to a broader swath of technology, spanning hardware, software, and IT services. The fund holds 71 stocks, with top allocations to Nvidia Corp (NASDAQ:NVDA), Apple Inc (NASDAQ:AAPL), and Microsoft Corp (NASDAQ:MSFT). This diversification dampens risk relative to SOXX’s narrow focus, and the fund’s much larger assets under management support greater liquidity.

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What this means for investors

These are two excellent ETFs, but each offers a different type of exposure to tech stocks. Which one you prefer depends on what you are looking for.

If you are looking for pure-play exposure to perhaps the fast-growing segment of the sector, chip stocks, then the iShares Semiconductor ETF is a great choice. This ETF is up 9% year-to-date and roughly 70% over the past year, easily beating the market and the broader tech sector. Chip stocks have been driving the market in recent years, and there is no sign of that slowing down anytime soon. Investing in an ETF like this, which focuses exclusively on chip stocks, certainly has its benefits over investing in a couple of individual chip stocks, as it offers broader, more diversified access. However, allocations should be kept relatively small, as this is a volatile, concentrated fund.

The State Street Technology Select Sector SPDR ETF is a great choice for broad exposure to large-cap tech stocks in the S&P 500. Over the past few years, it hasn’t generated the high returns that SOXX has; in fact, it is down almost 5% YTD and up 31% over the past year. But it has performed well over the long term, and it provides exposure to a cross-section of stocks within the sector. As such, it won’t be quite as volatile as SOXX, although it is still an aggressive growth fund, so it should be insulated within a balanced portfolio.

Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Applied Materials, Micron Technology, Microsoft, Nvidia, and iShares Trust - iShares Semiconductor ETF and is short shares of Apple. The Motley Fool has a disclosure policy.