Better Tech ETF for Artificial Intelligence: Vanguard's VGT with Broad Exposure or State Street XLK's Concentrated Mega-Cap Strategy

While the State Street Technology Select Sector SPDR ETF (NYSEMKT:XLK) and Vanguard Information Technology ETF (NYSEMKT:VGT) both track the U.S. tech sector, the Vanguard fund offers significantly broader diversification through its multi-cap index.

These funds serve as foundational blocks for investors targeting the innovation-driven growth of the American tech sector, including exposure to the artificial intelligence boom. While they may appear identical at first glance, subtle differences in index construction and portfolio concentration can lead to different outcomes during various market cycles.

The Vanguard fund is larger, with $160.2 billion in assets under management (AUM), compared to $119.3 billion for the State Street fund. This analysis explores how their unique weighting methodologies influence risk and reward.

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.

The cost difference is minimal, with the State Street fund maintaining a slight edge with an expense ratio of 0.08%. Both funds provide modest income, as most technology companies prioritize reinvesting capital into growth rather than issuing large dividend payments.

Performance & risk comparison

What's inside

The Vanguard Information Technology ETF provides a broad sweep of the domestic tech industry by tracking an index of small-, mid-, and large-cap companies. Its passive strategy results in a diverse portfolio of 310 holdings, and its sector allocation is 99% in Technology with trace exposure to industrials and financial services. Its largest positions include Nvidia at 17.16%, Apple at 16.26%, and Microsoft at 10.97%. The fund was launched in 2004. The Vanguard Information Technology ETF has paid $0.43 per share over the trailing 12 months, which on its recent ~$121.9 share price works out to a 0.4% yield.

The State Street Technology Select Sector SPDR ETF offers a more concentrated approach by focusing on the technology components of the S&P 500, with a sector breakdown of Technology at 99% and Communication Services at 1%. This selection process results in a portfolio of 73 holdings that emphasizes established mega-cap leaders while excluding smaller industry participants. Top holdings include Nvidia at 14.66%, Apple at 12.27%, and Microsoft at 9.96%. The fund was launched in 1998. The State Street Technology Select Sector SPDR ETF has paid $0.79 per share over the trailing 12 months, which on its recent ~$188.6 share price works out to a 0.4% yield.

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

Which looks like the better buy

Investors seeking exposure to the hot AI market can get that through the Vanguard Information Technology ETF (VGT) and the State Street Technology Select Sector SPDR ETF (XLK). Both hold key AI stocks such as Nvidia and Microsoft. Choosing between them depends on the factors that make the most sense for your portfolio.

XLK delivered a stronger one-year return thanks to its focus on tech companies within the S&P 500. This means you're invested only in the largest, most dominant players in the sector. While targeting mega-cap companies provides more stability to smaller enterprises, the fund's performance is entirely dependent on these giants. Also, this fund may not be for you if you already own many of the stocks among its holdings.

VGT's big advantage over XLK is that it takes a wider lens to the tech industry with over 300 holdings. This offers greater diversification, which also exposes you to smaller businesses seeing growth thanks to AI, such as CoreWeave, as well as the up-and-coming sector of quantum computers. The downside is that these businesses are highly volatile, as demonstrated by VGT's larger max drawdown.

Both ETFs lack exposure to AI companies classified outside of the technology sector due to the underlying indexes they track. For instance, neither include Google parent Alphabet.

Robert Izquierdo has positions in Alphabet, Apple, CoreWeave, Microsoft, and Nvidia. The Motley Fool has positions in and recommends Alphabet, Apple, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.