XLK is still alive: Why some analysts think it’s a portfolio booster

Volatility has been the name of the game for Big Tech names, and State Street’s Technology Select Sector SPDR ETF hasn’t escaped the turbulence. With earnings reports, capex levels, and macro fears fueling big swings in mega-cap stocks, XLK has been drifting lower thus far this year.

But many analysts see the ETF as a long-term growth engine for investors prepared to handle a few bumps along the way.

What’s driving the current volatility

XLK is designed to track large US tech companies, but it’s actually even more concentrated than some investors realize. With only around 70 holdings and heavy exposure to a handful of Big Tech titans, performance trends are often dictated by just a few companies.

In recent weeks, here’s what has been weighing on sentiment:

• Weakness is giants like Microsoft, Tesla, and Meta offset a rally in memory chips
• MSFT alone makes up more than 11% of XLT, so its earnings carry a lot of weight
• Investors are focusing more on weaker future guidance than strong past results

Meanwhile, more than 1,000 institutional investors have recently adjusted their positions, with some funds adding shares and others exiting.

At the end of the day, XLK is sitting just a few percentage points below key breakout levels. That means upcoming earnings (and forward guidance in particular) could shift sentiment abruptly.

How it compares to other tech ETFs

Not all tech-tracking funds are built the same, and it pays investors to understand the differences. XLK boasts a very low expense ratio of 0.08% along with lower costs and higher dividend yield than major rivals.

But what do other funds offer?

• The iShares US Technology ETF has a broader reach with roughly twice as many holdings. It offers slightly higher returns, but the tradeoff is deeper drawdowns.
• The Vanguard Information Technology ETF consists of more than 300 holdings with heavy exposure to AI semiconductors. It also comes with higher valuations and a more aggressive focus on growth.
• The Invesco QQQ Trust includes holdings beyond tech. That diversification provides more protection from sector volatility but less concentrated AI upside.

The Magnificent 7 and other mega-cap tech companies are no longer moving in tandem, which has created short-term pressure on funds like XLK while boosting long-term opportunity.

Believers in the Big Tech growth story can look at the fund as a low-cost, focused way to invest in the sector. But with a fund as concentrated as XLK, treat it as a bet that a handful of giant corporations will nail the execution.