State Street's uncapped sector ETFs put a price on owning the giants at full weight
Four new Market Sector SPDR funds give Nvidia, Amazon and Exxon their full index weight. They cost half as much again as the capped originals they are built from.
The first sector ETFs were built in 1998 to slice the S&P 500 into tidy pieces. Twenty-eight years later the pieces are no longer tidy. On Wednesday, October 14th, State Street Investment Management launched four funds whose purpose is to restore something its own flagship sector range deliberately removes: the full weight of the very largest companies. The State Street S&P 500 Market Sector SPDR ETFs cover technology (XLKM), consumer discretionary (XLYM), consumer staples (XLPM) and energy (XLEM). Each charges 0.12% a year.
The launch looks like a minor product extension. It is more revealing than that. It shows how far a handful of companies have outgrown the rules that shape ordinary sector funds, and it shows that in a market obsessed with ever lower fees, the industry has found a way to charge more for a purer version of something investors already own.
Why the originals are capped
The Select Sector SPDR funds, such as the technology fund XLK, track indexes that use what the prospectus calls a "modified market capitalization" method. Weights of single stock concentrations can be trimmed so that the funds conform to the requirements of the Internal Revenue Code, which sets diversification tests a fund must pass to keep its favourable tax treatment. When one company dominates a sector, the capped index holds it at less than its market value would dictate and spreads the difference across smaller names.
For most of the history of sector investing, that adjustment barely mattered. Today it is large. According to State Street figures reported by ETF Trends, Nvidia made up 15.41% of XLK but 20.93% of the uncapped index that XLKM follows. Apple was 18.85% of the new index against 13.88% of XLK, and Microsoft 15.27% against 11.25%. Taken together, the three largest technology companies account for roughly 55% of the uncapped index and about 40% of the capped fund.
The gap is widest in consumer discretionary. XLYM aims to hold Amazon at 43.23%, while Amazon was 23.54% of XLY. In staples, the new fund targets Walmart at 16.31% and Costco at 13.8%, compared with 10.75% and 9.1% in XLP. In energy, XLEM targets 29.26% for ExxonMobil against 23.56% in XLE. A capped sector fund, in other words, now differs materially from the sector it claims to represent.
A fund built from a fund
The construction is the most interesting part. Rather than buy every stock from scratch, each Market Sector fund holds its capped Select Sector sibling as a base and then tops up the largest companies directly or through derivatives. The prospectus, which became effective on October 13th, says each fund "prioritizes investment in the Underlying Fund" and may also hold individual shares, futures, options and total return swaps.
ETF Trends reported the starting positions. XLK made up 66.59% of XLKM's assets on October 13th. Through that stake XLKM owns roughly 10.3% of its assets in Nvidia, and it bought another 10.66% directly, bringing the total close to the index weight. XLYM held 63.82% of its assets in XLY and added 17.81% in Amazon shares, plus Amazon options. XLPM leaned least on its base, with XLP at 51.92% of assets, while XLEM leaned most, with XLE at 84.81%.
The design solves a practical problem. A new fund with about $500,000 of assets, which is roughly where each of the four started according to State Street's website, cannot replicate a sector efficiently on its own. Borrowing the liquidity of a fund family that, together with State Street's sector premium income range, held $393.6bn at the end of August is the obvious shortcut. Because the new funds are classified as non-diversified, they have room to carry weights that the original range is designed to avoid.
Paying more for less diversification
The fee is where the launch runs against the grain of the past decade. XLK's gross expense ratio is 0.08%, according to its September factsheet. XLKM charges 0.12%, which is half as much again, for an exposure that is more concentrated, not less. The prospectus does guard against paying twice: the management fee is reduced by any acquired fund fees attributable to the stake in the underlying fund. But the all-in cost remains above that of the capped fund that does most of the work.
There is a reasonable case for the premium. Sector funds are increasingly used as components inside model portfolios and asset allocation programmes that are measured against market-cap-weighted benchmarks. For those users, the capped versions introduce a deliberate gap between the fund and the benchmark, a tracking difference that grows whenever the largest company in a sector outperforms. State Street pitched the new range explicitly at "benchmark-aware investors, model portfolio builders, and asset allocators". Anna Paglia, the firm's chief business officer, said that sectors "are increasingly used as building blocks in asset allocation and model portfolios."
The point for individual investors is subtler. Choosing between a capped and an uncapped sector fund is no longer a technical detail; it is a decision about how much of a portfolio rides on one company. Someone who believes a sector fund spreads risk across a whole industry should note that an uncapped consumer discretionary fund is, on these targets, more than two fifths Amazon. Even the capped technology fund is not a broad bet: XLK's own factsheet put semiconductors and semiconductor equipment at 45.95% of the fund at the end of September.
What the launch says about the industry
Three things stand out. First, index construction has become a product feature in its own right. Issuers used to compete on the same benchmarks at lower prices; they now compete on variations of the benchmark, each with its own trade-off between concentration, tax rules and tracking.
Second, the fee war has limits. Plain exposure to large, liquid indexes is priced close to zero, but customisation still commands a premium, even when much of the product is a wrapper around an existing fund. Investors comparing funds by expense ratio alone may miss that the cheaper fund and the dearer one hold largely the same assets.
Third, concentration is now a design choice that has to be made explicitly. For years the capping rule did its work quietly in the background. With Nvidia, Apple and Microsoft at the weights they now carry, the difference between the two approaches is measured in whole percentage points of a single stock, and the gap between their returns will depend on how a few companies perform.
Our view
State Street has not invented a new asset. It has repackaged its own sector range so that the biggest companies carry their full market weight, and it is charging 0.12% for the privilege against 0.08% for the capped original. That is a sensible answer to a real demand from model builders who are judged against uncapped benchmarks, and the fund-of-fund structure is an efficient way to launch with little capital. For individual investors the more important message is about the market rather than the product: sector concentration has reached the point where two funds with almost identical names can hold the same company at weights nearly 20 percentage points apart. What to watch is whether assets actually move into the new funds, whether rivals respond with uncapped ranges of their own, and whether the fee premium survives once the funds reach scale. The label on a sector fund now says less than its index rulebook.
This article is for information only and is not investment advice.
Sources
- State Street: State Street Investment Management builds on nearly 30 years of sector ETF leadership with new Market Sector ETFs
- SEC: Select Sector SPDR Trust, Form 485BPOS prospectus for the Market Sector SPDR ETFs
- ETF Trends: New State Street sector ETFs give biggest stocks full weight
- State Street: Technology Select Sector SPDR ETF (XLK) fact sheet, as of September 30, 2026
- Pulse 2.0: State Street Investment Management launches four new S&P 500 Market Sector ETFs
Filed under Investing. Written by Invest Times Editorial under our editorial standards. Commentary and analysis for information only, not investment advice.
