Please allow me first clarify this with dynamic and differencing as it might get confusing.
A Virtual PC vhd can be of fixed size or dynamic. XP Mode can use a merged vhd or differencing disks. Hence dynamic and differencing are not two equal alternatives; a differencing XP Mode setup can use (and usually does use) dynamically expanding disks.
Back when Microsoft first published XP Mode, copying and backing it up was a bit more complicated. I even wrote a tutorial
back then about copying the XP Mode vhd. Today this tutorial is close to useless.
I would keep using differencing disks if I were you. The base is always there, as a backup you could simply copy the differencing part, your personal XP vhd to an external drive every now and then. Worst case scenario: XP Mode becomes useless, not responding > Create a new vm
selecting Use an existing vhd
option using your backup copy of the differencing individual vhd. Virtual PC would then automatically attach this differecing vhd to the base vhd and create a new XP Mode vm.