The State Street Financial Select Sector SPDR ETF, known by the ticker XLF, provides a much higher dividend yield at 1.42% compared to the Fidelity MSCI Information Technology Index ETF's 0.37%, which is FTEC. This divergence in yield underscores a key difference in strategy. Financial firms often pay out a larger share of their earnings to shareholders, while technology firms typically channel more money back into their businesses for future expansion. As a result, XLF offers a more predictable income stream and is considered less volatile, with a beta about half of FTEC's. This means it moves less sharply up and down compared to the broader market, making it more appealing to those focused on steady returns and income generation.
Past performance tells a different story
Over the past year, FTEC has returned an impressive 39.3%, significantly outperforming XLF. This strong performance extends further back: in the five-year period ending today, FTEC has also delivered better returns. However, this success comes with a cost. The technology-focused ETF experienced a sharper drop during its worst period compared to the financial sector ETF. This is to be expected, as the technology sector tends to be more volatile. High-growth stocks often see dramatic swings in value, especially in response to broader market sentiment and investor confidence in innovation. As a result, investors drawn to FTEC must be prepared for a bumpier ride and the possibility of steep downturns, even for those with a long-term outlook.
Portfolio allocations reveal sector concentration
XLF includes 76 different stocks, with major allocations in sectors like banking, insurance, and capital markets. The fund's top three holdings are JPMorgan Chase (11.7%), Berkshire Hathaway (11.7%), and Visa (7.6%). These financial heavyweights form the backbone of the ETF. In contrast, FTEC holds 285 companies, including key names like Apple (17.4%), Nvidia (16.5%), and Microsoft (10.6%). Despite the larger number of stocks, FTEC is more heavily concentrated in its top three positions, which together account for nearly 45% of the fund. This highlights that even with more names, the tech ETF still leans significantly on just a few major players.
For most investors, adding either ETF to their portfolio is less about achieving diversification and more about making a deliberate choice to take a stronger position in one sector or the other. Both financials and technology are already major components of the S&P 500 index. So, an investor who already owns a broad-based index fund is likely already exposed to companies like JPMorgan Chase, Berkshire Hathaway, Apple, Microsoft, and Nvidia. In this context, buying a sector ETF like XLF or FTEC isn’t really diversifying—it’s more like intensifying exposure in a specific direction. This approach can work well for focused strategies but can also add risk if the chosen sector doesn’t perform as expected.
The difference in performance between these funds reflects a broader pattern. Technology companies often lead during bull markets, capitalizing on innovation and investor optimism. But they also tend to decline more sharply during downturns. This is evident in FTEC’s deeper maximum drawdown over five years, a trade-off for the potential of outsized gains. Meanwhile, financials typically experience more moderate swings, with their performance influenced by factors like interest rates and economic conditions. This makes XLF a better fit for investors who prefer a more stable, income-focused strategy.
Each ETF caters to a different kind of investor. FTEC is best suited for those with a long investment horizon and a tolerance for volatility. These investors might be looking to capitalize on trends in artificial intelligence and semiconductors and are comfortable with the risks that come with them. In contrast, XLF is designed for those who want more predictability and a regular income stream, often reflecting the needs of those nearing retirement or those who seek financial stability. For newer investors, however, a broad-based index fund might be a better starting point than either of these sector ETFs.
Finally, it's important to note that the XLF and FTEC are not typical ETFs meant to be compared directly. They cover very different industries with distinct business models and risk profiles. While FTEC is newer, having launched in 2013, XLF has been around since 1998, making it one of the more established sector funds. For investors deciding whether to include either in their portfolios, the key question isn’t necessarily which fund is better, but whether the need exists to increase exposure to either financials or technology. In most cases, the answer is likely no—since both sectors are already well-represented in a standard index fund.