Tony's ETF Buyer's Guide: Sector ETFs (Vanguard versus State Street SPDR)

Vanguard versus State Street SPDR: The similarities

Both Vanguard and State Street SPDR offer investors a comprehensive selection of sector ETFs, each providing a lineup of 11 funds that correspond to the respective Global Industry Classification Standard (GICS) sectors. Here's a quick overview of their respective offerings:

Vanguard Sector ETFs:

1. Vanguard Communication Services ETF (
   VOX
   )
2. Vanguard Consumer Discretionary ETF (
   VCR
   -1.3%
   )
3. Vanguard Consumer Staples ETF (
   VDC
   )
4. Vanguard Energy ETF (
   VDE
   )
5. Vanguard Financials ETF (
   VFH
   )
6. Vanguard Health Care ETF (
   VHT
   )
7. Vanguard Industrials ETF (
   VIS
   )
8. Vanguard Information Technology ETF (
   VGT
   +0.03%
   )
9. Vanguard Materials ETF (
   VAW
   -1.72%
   )
10. Vanguard Real Estate ETF (
    VNQ
    )
11. Vanguard Utilities ETF (
    VPU
    )

State Street SPDR Sector ETFs:

• Communication Services Select Sector SPDR Fund (
  XLC
  )
• Consumer Discretionary Select Sector SPDR Fund (
  XLY
  )
• Consumer Staples Select Sector SPDR Fund (
  XLP
  )
• Energy Select Sector SPDR Fund (
  XLE
  )
• Financial Select Sector SPDR Fund (
  XLF
  )
• Health Care Select Sector SPDR Fund (
  XLV
  )
• Industrial Select Sector SPDR Fund (
  XLI
  )
• Technology Select Sector SPDR Fund (
  XLK
  )
• Materials Select Sector SPDR Fund (
  XLB
  )
• Real Estate Select Sector SPDR Fund (
  XLRE
  )
• Utilities Select Sector SPDR Fund (
  XLU
  )

Both Vanguard and State Street SPDR charge the same flat 0.10% expense ratio for these ETFs, translating to $10 annually for every $10,000 invested.

Characteristically, both ETF lineups are robustly capitalized, with most funds boasting billions in AUM. All are passively managed, tracking their respective index, and focus exclusively on U.S. stocks, maintaining low portfolio turnover.

Vanguard versus State Street SPDR: The differences

When comparing the sector ETF offerings from Vanguard and State Street SPDR, the first noticeable difference lies in their benchmark indices.

State Street SPDR sector ETFs track Select Sector Indices, which draw their constituents from the sectors of the S&P 500. This creates a portfolio focused on large stocks, typically resulting in a smaller number of holdings.

On the other hand, Vanguard's sector ETFs track MSCI indices, which are not limited to the stocks found in the S&P 500. This results in a broader mix of holdings, including more mid and small-cap stocks, and generally a greater number of holdings overall.

For instance, when comparing the Technology Select Sector SPDR Fund (

) with the Vanguard Information Technology ETF (

VGT

), we see this difference in action.

XLK comprises just 64 holdings, whereas VGT includes 318. Both ETFs are market-cap weighted, meaning their top holdings are similar.

However, XLK is more top-heavy with Microsoft Corp and Apple Inc making up 24.08% and 22.92% of the fund, respectively. In contrast, VGT's allocation to these two stocks is 18.59% for Microsoft Corp and 21.58% for Apple Inc.

There are also differences in liquidity and trading features between the two. Using VGT and XLK as examples, while both ETFs are highly liquid and popular, XLK edges out slightly in this aspect. It has a 30-day median bid-ask spread of just 0.01%, compared to VGT's 0.03%, and typically sees more trading volume.

 For active traders, State Street's lineup is often preferred due to its more developed options chain, offering more expiries and strike prices. This can be a significant factor for those employing more complex trading strategies or seeking specific hedging capabilities.

Vanguard versus State Street SPDR: My verdict

When it comes to choosing between Vanguard and State Street SPDR for passive sector exposure, you really can't go wrong with either. Both offer low-cost options, but your selection should be based on your specific investment objectives.

For buy-and-hold investors, Vanguard's sector ETFs may be the preferable choice. The broader indices that Vanguard's ETFs track result in greater diversification, including better exposure to mid and small-cap stocks. This makes Vanguard's funds a more comprehensive representation of the overall investable market sector, potentially offering a more balanced and varied investment experience.

On the other hand, for traders, SPDR's sector funds might be the better fit. These funds provide concentrated exposure to the major large-cap stocks that are often the primary movers and shakers in their respective sectors. Additionally, the SPDR lineup boasts better options chains and narrower bid-ask spreads, making them ideal for those involved in more frequent trading and complex strategies.

Another interesting approach is to alternate between Vanguard and SPDR funds as part of a tax-loss harvesting strategy. Given their similar holdings and historical performance yet tracking different indices, switching between these funds can be a savvy way to realize losses for tax purposes without significantly altering your market exposure.

Finally, it's worth noting that Vanguard and SPDR aren't the only players in the sector ETF game. Other providers also offer sector ETFs with varying strategies and exposures.

Notable NYSE-listed options include the iShares Global REIT ETF (

), which is internationally diversified as opposed to VNQ and XLRE, and the Invesco S&P 500 Equal Weight Utilities ETF (

RSPU

), which is much less top-heavy compared to VPU or XLU.

These alternatives can provide additional options for investors looking to tailor their sector exposure even further, whether it be through different investment methodologies or varying levels of market cap exposure. You can find more like them via the ETF Central screener.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.