The tech sector has produced many stocks that have outperformed the S&P 500. It’s no surprise to see many tech-heavy ETFs outperforming the market, but XLK and QQQ are among the top funds.

The Technology Select Sector SPDR Fund (NYSEARCA:XLK) and Invesco QQQ Trust (NYSEARCA:QQQ) have both more than doubled over the past five years. While their historical gains are impressive, investors must also look at each fund’s portfolio allocation and other factors before deciding which one is right for them.

This ETF analysis will help you gauge the optimal fund for your stock portfolio.

Long-Term Performance

It’s good to start by looking at how each fund has performed in the long run. While past results don’t guarantee future success, it’s nice to pick an ETF that hasn’t been flat during a historic bull market. 

QQQ has pulled ahead with a 24% return over the past year compared to XLK’s 17% return. However, the trend changes if you look further out. XLK has delivered a 142% return over the past five years, while QQQ is only up by 136% during the same stretch. 

Looking further, XLK has an annualized 18.5% return over the past 15 years. QQQ slightly edges it out with an 18.7% annualized return over the same time frame. XLK has a better annualized return if you look at the past 10 years. Its 20.6% annualized return is better than QQQ’s 18.7% return during that same 10-year window.

Both funds have low expense ratios, but XLK’s 0.09% expense ratio is better than QQQ’s 0.20% expense ratio. Most investors don’t buy these funds for their dividends, but curious investors may want to know that XLK’s 0.66% 12-month yield is higher than QQQ’s 0.56% 12-month yield. 

Portfolio Allocations

XLK offers more exposure to tech stocks than QQQ. The Technology Sector Select SPDR Fund puts all of its capital into tech stocks. Meanwhile, QQQ investors get exposure to additional sectors. Communication services and consumer cyclicals make up almost 30% of QQQ’s holdings. Invesco’s prized ETF still has more than half of its total assets in tech stocks.

Both funds have the Magnificent Seven stocks within their top 10 holdings. However, XLK is more top-heavy, with 62% of its assets allocated to its top 10 holdings. QQQ is top-heavy in its own right, allocating 52% of its assets to its top 10 holdings.

Before choosing either of these funds, you really have to ask yourself how you feel about Nvidia (NASDAQ:NVDA), Apple (NASDAQ:AAPL), and Microsoft (NASDAQ:MSFT). Those three stocks make up 40.7% of XLK’s total holdings. On the other hand, QQQ allocates 25.4% of its holdings to those three stocks. QQQ has 101 stocks in its portfolio, while XLK has 69 equity holdings. 

Should You Buy XLK or QQQ?

One of the main points to consider is that both funds focus heavily on Nvidia, Apple, and Microsoft. Investors who believe those three stocks will deliver strong gains may want to invest in XLK over QQQ. However, investors who aren’t sure if those three stocks can continue their string of wins may want to focus on QQQ instead of XLK. 

However, there is another detail to keep in mind. QQQ is more diversified. It has 101 equity holdings and has almost half of its assets in sectors that aren’t tech. Meanwhile, XLK completely loads up on tech stocks without any regard for other sectors. That formula has worked well for XLK over the past 5-year and 10-year intervals. However, QQQ has outperformed over the past year and over the past 15 years.

QQQ has less risk since it allocates a lower percentage of total assets into its top 10 holdings. Furthermore, QQQ puts its assets into multiple industries. XLK represents putting all of your eggs in one sector, but it is diversified across many stocks, just like QQQ.

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