VGT vs XLK – What is the difference?

Technology is ingrain in most parts of our daily life now. We use our phones to catch up on news, buy our groceries online, and are able to work remotely thanks to the technologies available. It is no wonder that most investor would want to include tech stocks in their portfolio. In this article, we will be doing a comparison of these tech ETFs, VGT (Vanguard Information Technology ETF) vs XLK (The Technology Select Sector SPDR Fund).

The main difference between VGT vs XLK is, VGT includes tech companies that are of small and medium market caps on top of the large-cap and above companies. XLK, on the other hand, only includes tech companies that are in the S&P 500 index. This means that it does not include companies that are of small and medium caps.

Now let’s read on for a more comprehensive coverage.

An Overview Of VGT vs XLK

VGTXLK
Benchmark IndexMSCI US Investable Market
Information Technology
25/50 Index
Technology Select
Sector Index
StylePassivePassive
Inception Date26 Jan 200422 Dec 1998
Expense Ratio0.10%0.12%
Number of Stocks34175
Yield0.82%0.89%
% of 10
largest holdings
55.64%66.08%
AUM41.5 B37.9 B
As of 3/18/2021
Source: advisors.vanguard.com and www.ssga.com

Both these funds are passively managed with the focus on technology theme.

VGT tracks the MSCI US Investable Market Information Technology 25/50 Index, which captures the large, mid and small cap companies in the Information Technology sector in the US. XLK tracks the Technology Select Sector Index, which only include technology companies that are in the S&P 500 index.

This is also why we see the vast difference in the number of stocks held by each ETF.

The expense ratio is 0.10% for VGT and 0.12% for XLK. This means that for every $10,000 invested, $10 (VGT) and $12 (XLK) of fees are paid each year for management expenses.

Top 10 Holdings

VGTXLK
Apple Inc. (AAPL)
19.55%
Apple Inc. (AAPL)
20.72%
Microsoft Corp. (MSFT)
15.83%
Microsoft Corp. (MSFT)
20.19%
NVIDIA Corp. (NVDA)
3.22%
Visa Inc. Class A (V)
4.30%
Visa Inc. (V)
3.19%
Mastercard Inc. (MA)
3.82%
Mastercard Inc. (MA)
2.99%
NVIDIA Corp. (NVDA)
3.71%
PayPal Holdings Inc. (PYPL)
2.74%
PayPal Holdings Inc. (PYPL)
3.33%
Intel Corp. (INTC)
2.36%
Intel Corp. (INTC)
2.97%
Adobe Inc. (ADBE)
2.09%
Adobe Inc. (ADBE)
2.44%
salesforce.com Inc. (CRM)
1.87%
Cisco Systems Inc. (CSCO)
2.37%
Broadcom Inc. (AVGO)
1.80%
salesforce.com Inc. (CRM)
2.21%
55.64% of total asset66.08% of total asset
As of 3/18/2021
Source: advisors.vanguard.com and www.ssga.com

The top 10 holding for this 2 ETFs are very similar. 9 out of the top 10 holdings are the same. And the top 10 on both funds makes up more than half of the total asset.

What is even more interesting is, all the 75 companies that are in XLK can be found in VGT. And these 75 companies makes up 83.47% of the total asset of VGT.

The remaining 266 companies only makes up the rest of the 16.53% in VGT.

This means that when you buy VGT, you are also buying XLK in the process.

Performance of VGT vs XLT

Using the Portfolio Visualizer to back test these 2 ETFs, we can then compare the portfolio growth between Feb 2004 – Feb 2021. The time period was constrained by the available data for Vanguard Information Technology ETF (VGT) 

VGT vs XLK portfolio growth

This is what you would have ended up with in Feb 2021, if you have invested $10,000 at the beginning of 2004.

VGT (Vanguard Information Technology ETF): $87,302
XLK (The Technology Select Sector SPDR Fund): $77,612

From the graph above, we can see that VGT outperformed XLK by an additional $9,690 (12.4%) in returns.

Annual Returns

VGT vs XLK annual returns 2021

In the past 15 years, there is only 1 year where VUG has negative returns, compared to XLK, which has negative returns in 2005, 2008 and 2018.

Both funds performed rather similar during the market downturn in 2008. VGT had losses of -42.82% vs XLK’s -41.51%.

Annualized Returns

1 Year3 Year5 Year10 YearSince
Inception
VGT45.94%30.54%25.24%20.49%13.17%
XLK49.59%25.89%27.96%19.19%8.08%
As of 3/18/2021
Source: advisors.vanguard.com and www.ssga.com

The 10 years annualized return for VGT and XLK are 20.49% and 19.19% respectively. These are rather decent returns for funds that are passively managed.

Conclusion

Based on the past performance, VGT (Vanguard Information Technology ETF) is the one to pick with a portfolio growth of 12.4% more than XLK.

It also perform better in terms of the annual returns. In the last 15 years, 2008 is the only year where it had negative returns. On top of that, both funds perform similar during the 2008 downturn, similar losses but better returns for VGT.

I also like that when you VGT, you are also also buying XLK. Because all the companies that are in XLK are also in VGT. And further more, VGT is a little more diversified with the fact that it had 341 companies in the fund compared to the 75 in XLK.

VGT just ticks all the boxes:

  • Higher returns
  • Similar performance during downturn
  • lower expense ratio
  • more diversified

As always, remember that Past Performance is No Guarantee of Future Results.