What is the correlation between QQQ and XLK?

The Pearson correlation coefficient between QQQ and XLK annual returns from 2001 to 2025 is 0.977 — extremely high. This near-perfect co-movement indicates that both ETFs are driven by the same underlying market forces, primarily mega-cap technology earnings cycles, despite holding different constituent securities.

Which has a higher Sharpe ratio — QQQ or XLK?

Over the 25-year study period (2001-2025), XLK produced a marginally higher Sharpe ratio of 0.306 versus QQQ's 0.292. This indicates XLK delivered slightly better risk-adjusted returns, primarily due to lower annualized standard deviation (26.4% vs 27.8%) despite nearly identical CAGR figures of approximately 10.6%.

Does QQQ include Google and Meta?

Yes. QQQ includes Alphabet (Google) and Meta as significant holdings because it tracks the Nasdaq 100 index by market capitalization regardless of GICS sector classification. XLK excludes both companies entirely, as they were reclassified from the Technology sector to the Communication Services sector in September 2018 under the Global Industry Classification Standard (GICS) revision.

What is the CAGR of QQQ vs XLK over 25 years?

Both ETFs recorded a compound annual growth rate (CAGR) of approximately 10.6% over the 25-year back-test period from 2001 to 2025. QQQ grew $1 to $12.47 and XLK grew $1 to $12.35 — a difference of just $0.12 per dollar invested, which falls within normal tracking variance and is not statistically meaningful for portfolio construction purposes.

Which ETF is better for a diversified portfolio — QQQ or XLK?

Neither ETF provides meaningful diversification on its own due to their 0.977 mutual correlation. When paired with low-correlation assets such as XLU (Utilities, correlation 0.028 with QQQ) or XLE (Energy), the choice between QQQ and XLK produces negligible differences in portfolio-level Sharpe ratio — less than 0.001 difference across tested allocation ranges. The asset allocation percentages are far more statistically significant than the QQQ vs XLK selection.

// BrixNation Quantitative Research

QQQ vs XLK — Quantitative Analysis

25-Year Empirical Back-Test · 2001–2025 · Annual Return Statistics

Study Period: 2001-2025 N = 25 Annual Observations Metric: Total Return incl. Dividends Risk-Free Rate: 2.5% Benchmark: S&P 500 Total Return

  Methodology & Data Set  · 
  Study Period: 2001-2025 (N=25 annual observations)  ·  Assets: QQQ, XLK, S&P 500 benchmark  · 
  Returns: Annual total return including dividends reinvested  · 
  Risk-free rate proxy: 2.5%  · 
  Source: Yahoo Finance, Slickcharts, Visual Capitalist  · 
  Not financial advice. Past performance does not guarantee future results.

QQQ 25-Yr CAGR

10.62%

$1.00 → $12.47

XLK 25-Yr CAGR

10.58%

$1.00 → $12.35

Pearson Correlation

0.977

Near-perfect co-movement

QQQ Std. Deviation

27.8%

Annualized volatility

XLK Std. Deviation

26.4%

Annualized volatility

XLK Sharpe Ratio

0.306

vs QQQ: 0.292

Key Findings

Empirical analysis of 25 annual return observations (2001–2025) reveals that QQQ and XLK exhibit a Pearson correlation coefficient of 0.977 — indicating near-identical return behavior across all observed market cycles. Despite material differences in constituent holdings, the two instruments are statistically interchangeable for portfolio construction purposes. CAGR differential of 4 basis points falls within normal tracking variance.

Finding 1 — Return Equivalence

Over the full 25-year back-test period, QQQ delivered a CAGR of 10.62% vs XLK at 10.58% — a differential of 4 basis points annualized. Terminal value per dollar invested: QQQ $12.47, XLK $12.35. This 1.0% terminal value difference is not statistically significant for long-horizon portfolio planning.

Finding 2 — Correlation & Diversification

Pearson correlation coefficient of 0.977 between QQQ and XLK annual returns confirms that holding both instruments simultaneously provides negligible incremental diversification. The two ETFs are driven by identical macro factors: mega-cap technology earnings cycles, interest rate sensitivity, and AI/cloud infrastructure investment cycles.

Finding 3 — Risk-Adjusted Performance

XLK produced a marginally superior Sharpe ratio of 0.306 vs QQQ's 0.292, attributable to lower annualized standard deviation (26.4% vs 27.8%). The lower volatility in XLK reflects the absence of Amazon (Consumer Discretionary), Meta, and Tesla — all of which exhibit higher individual standard deviation than the pure Technology sector constituents.

Finding 4 — Sub-Period Divergence

Decade-segmented analysis reveals QQQ underperformed XLK in the 2020–2025 sub-period (20.1% vs 22.1% CAGR), despite outperforming in the 2001–2010 period. Amazon's 2022 decline of approximately 50% was the primary driver of QQQ's relative underperformance versus the pure Technology sector in the recent sub-period.

Compound Growth Analysis — $1 Invested (2001–2025)

Cumulative total return indices for QQQ, XLK, and the S&P 500 benchmark, rebased to $1.00 at January 2001. The two series track with a root-mean-square deviation of approximately $0.31 across the full study period, reflecting the high correlation coefficient.

Logarithmic growth representation. Total returns include dividend reinvestment. S&P 500 included as benchmark reference series.

Annual Return Distribution — QQQ vs XLK (2001–2025)

Bar chart of annual total returns for both instruments across all 25 observations. The two series exhibit near-identical distribution shape and magnitude, with the largest single-year divergence of 10.4 percentage points recorded in 2013 (QQQ +36.6% vs XLK +26.2%), attributable to Amazon and Google weight differential in that period.

Annual total returns including dividends. 25 observations, 2001–2025.

Sub-Period CAGR Analysis — Decade Segmentation

Segmenting the 25-year back-test into three sub-periods reveals that QQQ and XLK track almost identically in all three periods, confirming that the correlation holds across different market regimes. Gold is shown as a reference asset to contextualize the relative performance of technology-linked instruments across different macro environments.

CAGR computed for each sub-period independently. Gold shown as non-equity reference asset.

Full Statistical Summary — 25-Year Study Period

Statistic	QQQ	XLK	S&P 500	Advantage
CAGR (25-year)	10.62%	10.58%	8.82%	QQQ +4bps
Terminal Value ($1 invested)	$12.47	$12.35	$8.28	QQQ
Annualized Std. Deviation	27.8%	26.4%	17.9%	XLK lower risk
Sharpe Ratio (rf=2.5%)	0.292	0.306	0.353	XLK
Positive Return Years	19 / 25	18 / 25	19 / 25	QQQ
Mean Annual Return (up years)	+28.4%	+25.3%	+20.1%	QQQ
Mean Annual Return (down years)	-22.8%	-22.0%	-14.1%	XLK shallower
Maximum Single-Year Return	+56.4% (2023)	+56.0% (2023)	+32.4% (2013)	QQQ
Minimum Single-Year Return	-41.7% (2008)	-41.4% (2008)	-37.0% (2008)	XLK
Pearson Correlation (vs S&P 500)	0.957	0.944	1.000	Comparable
QQQ vs XLK Correlation	0.977		—	Redundant pair

Constituent Holdings Analysis — Structural Differences

The 2018 GICS sector reclassification created a permanent structural divergence in constituent composition between QQQ and XLK. Alphabet (Google) and Meta were transferred from the Technology sector to the newly created Communication Services sector, removing them from XLK while retaining them in QQQ's Nasdaq 100 index methodology. This composition difference has not produced statistically significant return divergence at the portfolio level.

Security	QQQ Weight	XLK Weight	GICS Classification	Inclusion basis
Apple (AAPL)	~9%	~12.9%	Information Technology	Both track Technology
Microsoft (MSFT)	~8%	~11.5%	Information Technology	Both track Technology
Nvidia (NVDA)	~8%	~15%	Information Technology	Both track Technology
Alphabet / Google	~5%	Excluded	Communication Services	Reclassified Sept 2018
Meta Platforms	~5%	Excluded	Communication Services	Reclassified Sept 2018
Amazon (AMZN)	~6%	Excluded	Consumer Discretionary	Not Technology sector
Tesla (TSLA)	~4%	Excluded	Consumer Discretionary	Not Technology sector
Broadcom (AVGO)	~4%	~4.5%	Information Technology	Both track Technology

Despite constituent differences representing approximately 20-24% of QQQ's weight, the correlation coefficient of 0.977 confirms that these additional holdings do not produce materially differentiated return profiles at the annual observation level.

Annual Return Data — Full Observation Set (N=25)

Year	QQQ Return	XLK Return	Absolute Diff.	Outperformer	S&P 500

Mean absolute annual difference: 4.8 percentage points. Median absolute difference: 3.1 percentage points.

What does a 0.977 correlation between QQQ and XLK mean?

A Pearson correlation coefficient of 0.977 means the two instruments move almost identically on an annual basis. A perfect correlation would be 1.000. At 0.977, the two series share approximately 95.4% of their variance (r-squared = 0.954), meaning less than 5% of each instrument's annual return is statistically independent of the other. For portfolio construction, this confirms that holding both ETFs provides negligible incremental diversification benefit.

How is the Sharpe ratio calculated for these ETFs?

The Sharpe ratio is calculated as (CAGR minus risk-free rate) divided by annualized standard deviation of returns. Using a risk-free rate proxy of 2.5%: XLK Sharpe = (10.58% - 2.5%) / 26.4% = 0.306. QQQ Sharpe = (10.62% - 2.5%) / 27.8% = 0.292. The 14 basis point Sharpe advantage for XLK reflects its lower standard deviation, despite virtually identical CAGR.

Why did QQQ underperform XLK in the 2020-2025 sub-period?

In the 2020-2025 sub-period, Amazon fell approximately 50% in 2022 (a constituent in QQQ but not XLK), which disproportionately impacted QQQ's return relative to XLK. Additionally, Meta's inclusion in QQQ added drag in 2022 (-64%) before contributing significantly to recovery in 2023. These Consumer Discretionary and Communication Services names increased QQQ's effective volatility relative to XLK's pure Technology sector exposure in this sub-period.

Should QQQ or XLK be used in a diversified ETF portfolio?

Quantitative analysis shows that the choice between QQQ and XLK produces differences of less than 0.001 in portfolio-level Sharpe ratio when either is combined with low-correlation assets such as XLU (Utilities). The allocation percentage to the growth engine (QQQ or XLK) is statistically far more significant than the choice of instrument. Either is appropriate; the decision should be based on preference for the additional QQQ holdings (Google, Meta, Amazon, Tesla) rather than expected return differential.

Data Sources & References

This analysis is for informational and educational purposes only. It does not constitute financial advice. All statistics are computed from publicly available annual return data. Back-tested results do not guarantee future performance.