Is the Vanguard Information Technology Index Fund the Best Tech ETF?

Technology has been a dominant force in the stock market for the last two decades. Some of the world's most valuable companies, such as Nvidia, Meta Platforms, and Advanced Micro Devices, belong to this high-growth sector.

As a result, many of the top-performing exchange-traded funds (ETFs) in 2023 have an undeniable technological skew to them. The appeal of tech among growth investors isn't altogether surprising, given that technological innovations -- such as social media, smartphones, and high-performance computing -- have been radically reshaping our world since the early 2000s.

Which tech ETF is the best buy?

Although there's a surfeit of candidates, the three most popular passively managed ETFs in this category are the Fidelity MSCI Information Technology Index ETF (FTEC 1.63%), the Technology Select Sector SPDR Fund (XLK 1.13%), and the Vanguard Information Technology Index Fund (VGT 1.72%). These three tech-oriented ETFs are prized for their low expense ratios and remarkable excess returns, relative to the S&P 500. Here's a comparison of these three popular tech ETFs.

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A comparison

The table below outlines the most important metrics for each fund.

Alpha and beta refer to the performance of the fund, relative to an appropriate benchmark over the past 36 months. The Vanguard 500 Index Fund (VOO 1.00%) tracks the S&P 500 index. It serves as a performance benchmark in this comparison of tech ETFs. All fund data courtesy of Charles Schwab.

Technology stocks have been the main contributors to the U.S. market's impressive performance in recent years, and these three ETFs have captured that growth remarkably well. The FTEC, the VGT, and the XLK all returned more than double the VOO, an ETF that follows the S&P 500 index.

They did this even though they had higher costs and lower payouts than the VOO. This demonstrates the enormous growth potential of technological innovation.

Winner?

Among these three tech ETFs, however, one outperforms the others: the XLK. The XLK had the highest total returns (assuming dividends were reinvested and before taxes), compared to the FTEC and the VGT over the past 10 years. It also has a similar expense ratio and yield as its peers in the category. Therefore, the XLK earns the top spot in this comparison, even though it competes with one of the best-performing Vanguard ETFs, which often excel in their categories.

Nonetheless, investors should not overlook any of these excellent tech ETFs. All three have significantly outperformed the S&P 500 over the last 10 years, and the differences in returns among them are not particularly large.