ETF Comparison: Technology Select Sector SPDR Fund (XLK) Versus iShares Expanded Tech Sector ETF (IGM)

XLK vs IGM: Total cost of ownership

State Street recently reduced expense ratios across all 11 Select Sector SPDR ETFs, lowering XLK’s expense ratio to 0.09%, down from its previous 0.1%. Meanwhile, IGM

hasn’t followed suit, maintaining a much higher 0.41% expense ratio. This creates a nearly fourfold difference, with XLK

XLK

costing just $9 annually for every $10,000 invested compared to IGM’s $41.

XLK also wins on implicit trading costs. The Select Sector SPDR suite is highly liquid, thanks to its exclusive focus on S&P 500 stocks within specific sectors. XLK’s 30-day median bid-ask spread is just 0.007%. While IGM isn’t far behind at 0.035%, it’s still noticeably higher.

Verdict: XLK takes a clean sweep on total cost of ownership. Its lower expense ratio and superior liquidity make it the more cost-effective choice.

XLK vs IGM: Methodology and holdings

Both ETFs are passive, tracking indexes that appear to focus on technology stocks. However, a closer look under the hood reveals some significant differences in their approaches.

XLK

tracks the S&P Technology Select Sector Index, which selects 68 technology stocks from the S&P 500 and weights them by market capitalization. But there’s a catch: XLK only includes stocks classified as technology under the Global Industry Classification Standard (GICS).

This means it holds big names like Apple, Nvidia, and Microsoft, but excludes companies like Alphabet (Google) and Meta, which fall under the communications sector, and Amazon or Tesla, which are classified as consumer discretionary.

IGM

, on the other hand, tracks the S&P North American Expanded Technology Sector Index. This index casts a wider net, including not just technology stocks but also companies in the communications sector. As a result, IGM holds both Alphabet share classes, Meta, and Netflix in addition to the core tech giants.

The end result is that IGM is far more diversified, with 279 holdings compared to just 68 in XLK. This also makes IGM less concentrated at the top. Its top 15 holdings account for 63.16% of the ETF, compared to 73.62% for XLK.

Moreover, XLK’s top three holdings—Apple, Nvidia, and Microsoft—currently make up nearly 43% of the ETF’s weight. In contrast, the top three in IGM—Nvidia, Meta, and Apple—combine for less than 30%.

Verdict: XLK’s narrower focus creates higher concentration, while IGM offers broader diversification by incorporating communication stocks alongside traditional tech. Personally, I prefer the latter.

XLK vs IGM: Risk and return

Both ETFs deliver strong returns, reflecting the tech sector’s outperformance, but there are some important nuances to consider.

In the short term, XLK

has underperformed IGM

IGM

on a year-to-date and one-year trailing basis. However, XLK pulls ahead on three-year returns while attracting significantly higher inflows. This is unsurprising given XLK’s lower fees and its reputation as a flagship technology ETF.

Over the long term, from March 19, 2001, to November 25, 2024, IGM edges out XLK with an annualized return of 11.33% versus 11.02%. However, XLK comes out ahead on a risk-adjusted basis, with a Sharpe ratio of 0.49 compared to IGM’s 0.47, likely due to the focus on solely S&P 500 large-caps.

When it comes to risk, both ETFs exhibit nearly identical historical standard deviations, indicating similar levels of volatility. However, IGM

has experienced a deeper and longer maximum drawdown compared to XLK

XLK

, suggesting that its broader diversification has not translated into better downside protection.

Verdict: This round goes to IGM for its slightly better long-term performance, even if it lags XLK on a risk-adjusted basis. While the diversification hasn’t provided a tangible risk advantage, IGM’s overall returns still give it the edge in this category.

This article is for informational purposes only and does not in any way constitute investment advice. The author may express their own opinions, which may not represent the opinions of ETF Central or its affiliated partners. It is essential that you seek advice from a registered financial professional prior to making any investment decisions.