For investors looking to gain exposure to the booming technology sector, two exchange-traded funds (ETFs) frequently come into consideration: XLK and VGT. These funds represent two of the most popular technology-focused ETFs in the market, offering broad access to some of the largest and most innovative tech companies in the United States. However, many investors find themselves asking: what is the overlap between XLK and VGT? Understanding the similarities and differences between these funds is essential for making smart portfolio decisions, minimizing redundancy, and ensuring effective diversification.
Overview of XLK and VGT
XLK: Technology Select Sector SPDR Fund
XLK is managed by State Street Global Advisors and is designed to track the Technology Select Sector Index. This ETF primarily focuses on the technology sector as defined by the Global Industry Classification Standard (GICS). XLK holds a relatively narrow selection of stocks around 60 as of the latest data which includes some of the most prominent technology giants in the U.S. market.
VGT: Vanguard Information Technology ETF
VGT, on the other hand, is managed by Vanguard and seeks to track the performance of the MSCI US Investable Market Index (IMI) for the Information Technology sector. Compared to XLK, VGT has a broader scope, with a portfolio of over 300 holdings, spanning large, mid, and small-cap tech stocks.
Top Holdings and Fund Composition
Where XLK and VGT Overlap
The most notable similarity between XLK and VGT lies in their top holdings. Both funds are heavily weighted toward mega-cap technology companies, such as:
- Apple Inc. (AAPL)
- Microsoft Corporation (MSFT)
- NVIDIA Corporation (NVDA)
- Broadcom Inc. (AVGO)
- Adobe Inc. (ADBE)
In fact, these top five companies account for a significant portion of both funds’ total net assets. The presence of these giants creates a high degree of overlap in performance, especially when the broader market is influenced by developments in these large-cap tech stocks.
Differences in Holdings
Despite their overlap at the top, VGT and XLK differ significantly as you go deeper into their portfolios. XLK focuses only on the companies in the S&P 500, which limits its exposure to mid and small-cap stocks. VGT, in contrast, includes a much wider range of technology companies, including many that are not part of the S&P 500.
This broader diversification gives VGT exposure to more emerging technology firms, which can offer higher growth potential but also come with increased volatility.
Sector Allocation and Exposure
GICS vs. MSCI Classification
One important factor contributing to differences in XLK vs VGT overlap is the way sectors are classified. XLK uses the GICS classification, which sometimes excludes certain companies that are classified differently in the MSCI system used by VGT.
For instance, companies like Alphabet Inc. (GOOGL) and Meta Platforms Inc. (META) are not included in XLK because GICS classifies them under Communication Services. However, VGT may include companies like these if the MSCI methodology considers their business to be sufficiently technology-related.
Industry Subsector Differences
VGT includes a more diverse mix of subsectors within the tech space, such as:
- Semiconductors
- Software & IT Services
- Hardware & Equipment
- Data Processing and Outsourced Services
XLK has a more concentrated allocation, especially in software and IT services, making it slightly more focused in terms of sector exposure.
Expense Ratios and Cost Comparison
Management Fees
Cost is an important consideration for any investor. XLK comes with an expense ratio of 0.10%, while VGT has a slightly higher expense ratio of 0.10% as well (based on the most recent data, although Vanguard is known for lowering costs over time).
Because both ETFs are relatively low-cost, they are appealing choices for long-term investors. However, those with extremely cost-sensitive strategies may lean toward whichever has a lower total ownership cost, which includes factors like bid-ask spread and trading volume.
Liquidity and Volume
XLK tends to have higher average daily trading volume than VGT, making it slightly more liquid. This can result in tighter bid-ask spreads and easier execution for large trades. VGT still maintains strong liquidity but may be more suitable for buy-and-hold investors who aren’t concerned with frequent trading.
Performance and Volatility
Similar Returns Driven by Shared Holdings
Because XLK and VGT share so many of the same top holdings, their historical performance tends to be very similar, especially during periods where mega-cap tech stocks are driving market gains. Over the past 5 to 10 years, both funds have delivered robust returns fueled by strong performance from companies like Apple and Microsoft.
Differences in Risk Profile
VGT’s broader exposure to mid and small-cap companies can result in slightly higher volatility compared to XLK. While this added risk can lead to higher long-term returns, it also increases the potential for short-term drawdowns. XLK, being more concentrated and focused on large-cap stocks, generally offers more stability during market corrections.
Choosing Between XLK and VGT
Portfolio Strategy and Goals
Investors choosing between XLK and VGT should consider their investment goals and risk tolerance. Some key questions to ask include:
- Are you seeking broader exposure to the entire tech sector (VGT)?
- Do you prefer a more concentrated portfolio of large-cap tech leaders (XLK)?
- Are you concerned about sector classification differences like GICS vs. MSCI?
- How sensitive are you to volatility and expense ratios?
Reducing Redundancy
Holding both XLK and VGT in the same portfolio may not be the most efficient approach due to their high degree of overlap. Investors concerned about duplication should analyze their combined holdings to avoid being overexposed to a handful of companies like Apple and Microsoft. Tools like ETF overlap calculators can help quantify the actual percentage of shared holdings between the two funds.
The overlap between XLK and VGT is substantial, especially among their top holdings, which include many of the same large-cap tech companies. However, the differences in fund structure, classification systems, and breadth of holdings make each ETF unique. XLK provides a more focused approach with a narrower set of holdings, while VGT offers broader diversification across the tech sector, including small and mid-cap stocks.
Ultimately, the choice between XLK and VGT depends on your investment strategy. If you seek simplicity, concentration, and higher liquidity, XLK may be suitable. If you prefer broader exposure with the potential for capturing growth from lesser-known tech firms, VGT might be the better option. Understanding their overlap and distinctions can help you construct a more effective, diversified portfolio tailored to your financial goals.