Tech Etfs: Worth The Investment?

Technology ETFs are a great way to invest in the technology sector without the risks associated with individual stocks. Tech ETFs provide exposure to a range of tech stocks, from hardware and software companies to those specialising in artificial intelligence, cybersecurity, and cloud technology. With ETFs, you can hold many of the biggest names in Big Tech in a single ticker, making them a smart alternative to stock picking. Tech ETFs are also known for their high growth potential, offering investors the possibility of higher returns. While the tech sector has experienced some turbulence in recent years, it remains resilient and is likely to remain relevant in our current world. When considering investing in tech ETFs, it is important to research specific funds and their underlying holdings to make an informed decision.

What are the risks and benefits of investing in technology ETFs?

Technology ETFs offer a stable way to invest in technology without the risks of individual stocks. They are a form of exchange-traded fund (ETF) that focuses on investing in companies within the technology sector. Tech ETFs include companies that create and distribute hardware, such as computers, smartphones, semiconductors and other electronics, and software, such as artificial intelligence, cybersecurity and cloud technology.

Benefits of Investing in Technology ETFs:

• Diversification: Tech ETFs hold dozens or even hundreds of tech stocks, reducing the risk of individual stock picking.
• High Growth Potential: Tech ETFs provide exposure to high-growth technology companies, increasing the odds of earning higher returns.
• Reduced Risk: By diversifying across multiple companies, Tech ETFs lower the risk associated with investing in individual tech stocks.
• Simplicity: Tech ETFs offer a simple way to invest in the technology sector without the need for stock-picking expertise.
• Access to Cutting-Edge Technology: Tech ETFs provide access to companies at the forefront of innovation, such as robotics, AI, cybersecurity, and genomics.

Risks of Investing in Technology ETFs:

• Volatility: Tech stocks tend to be more volatile than other sectors due to their higher risk/reward profile. This means greater potential returns but also a higher risk of losses.
• Concentration Risk: Some Tech ETFs are highly concentrated in a few large tech companies, such as Apple, Microsoft, and Nvidia. This can increase the impact of a single company's performance on the overall portfolio.
• Sector-Specific Risk: Investing in a specific sector, like technology, carries its own risks. The performance of the technology sector can be influenced by various factors, such as economic conditions, regulatory changes, and competition.
• Cherry-Picking Winners: Not all tech companies succeed, and it can be challenging to identify the winners. Tech ETFs may hold a mix of successful and unsuccessful companies, which can impact overall returns.

In summary, investing in Technology ETFs offers a balanced approach to investing in the technology sector. While providing access to high-growth potential and diversification benefits, investors should also be aware of the risks associated with volatility, concentration, and sector-specific challenges. Due diligence and research are essential before making any investment decisions.

What are the best-performing tech ETFs?

Tech ETFs offer a stable way to invest in technology without the risks of individual stocks. Here are some of the best-performing tech ETFs:

Vanguard Information Technology ETF (VGT)

VGT is the only technology ETF to earn both Morningstar's highest five-star rating and a gold badge, indicating the highest conviction that the fund will outperform a relevant benchmark of its peers over a market cycle. With $77.5 billion in assets, it is perhaps the largest truly sector-specific technology ETF. It is also one of the more inexpensive offerings, charging just 0.1% annually in fees. The ETF tracks a broad index of U.S. tech companies of all sizes and is an excellent choice for investors who want a diverse set of tech stocks.

Technology Select Sector SPDR ETF (XLK)

Ranked the No. 1 technology ETF by U.S. News, XLK has earned five stars and a silver badge from Morningstar. It has a low 0.09% expense ratio, meaning you'll pay just $9 annually for every $10,000 you invest. XLK tracks the performance of the technology companies in the S&P 500 and includes firms in many aspects of the tech industry, from hardware and storage providers to semiconductors and IT services.

VanEck Semiconductor ETF (SMH)

SMH is one of the best-performing ETFs in the technology sector, with a one-year return of 73.2%. Over a 10-year period, this share class outpaced the category's average annual return by 11.2 percentage points. It also beat the US Technology Index by 5.2 percentage points over the same period. The fund seeks to replicate the price and yield performance of the MVIS US Listed Semiconductor 25 Index.

IShares Expanded Tech Sector ETF (IGM)

This fund has provided superior returns compared with peers, with a one-year return of 65.5%. Over a 10-year period, IGM outperformed the category's average annual return by 4.4 percentage points. The fund seeks to track the investment results of an index composed of North American equities in the technology sector and select names from communication services and consumer discretionary sectors.

IShares US Technology ETF (IYW)

IYW has provided better returns compared with peers, with a one-year return of 65.5%. Over a 10-year period, this share class outperformed the category's average annual return by 5.9 percentage points. The fund seeks to track the investment results of the Russell 1000 Technology RIC 22.5/45 Capped Index.

IShares US Tech Independence Fcs ETF (IETC)

Over the past three years, IETC has outperformed its average peer by 10.5 percentage points. The fund seeks to provide access to US companies with technology exposure, as classified using a proprietary system.

IShares Semiconductor ETF (SOXX)

This fund has outpaced its average peer by 10.8 percentage points annualized over a 10-year period. It also beat the Morningstar US Technology Index by an annualized 4.7 percentage points over the same period. The fund seeks to track the investment results of the NYSE Semiconductor Index, composed of US equities in the semiconductor sector.

Fidelity MSCI Information Tech ETF (FTEC)

Ranked the second-best technology ETF by U.S. News & World Report, FTEC is also favored by Morningstar analysts, who give it five stars and a silver badge. The fund has been a strong performer over the past market cycle, returning over 53% in 2023 and over 22% year to date. FTEC tracks the MSCI USA IMI Information Technology Index, which covers the entire U.S. IT sector, including lesser-known tech companies.

SPDR NYSE Technology ETF (XNTK)

XNTK holds 35 leading U.S. technology companies in its portfolio, defined as companies with a minimum market capitalization of $2 billion and a trailing three-month average daily trading value of $10 million. The fund is required to have at least 75% of its assets from companies headquartered in the U.S., but it still maintains good geographic diversity, with nearly 15% of assets based outside the country.

IShares Future Cloud 5G and Tech ETF (IDAT)

IDAT takes a global approach to the cloud computing industry, investing in companies of all sizes from both developed and emerging markets. The fund's portfolio starts with well-known names like Nvidia and Broadcom, but also includes less familiar companies like Arista Networks and Pure Storage. The fund is fairly diverse, with 76% of its 47 stocks based in the U.S.

Invesco QQQ ETF (QQQ)

The Invesco QQQ ETF is the largest Nasdaq-tracking ETF, with a relatively low 0.20% expense ratio. The fund tracks the Nasdaq-100 index, which is an index of the largest stocks listed on the Nasdaq exchange. While not a pure tech ETF, it is tech-heavy, with more than 60% of its assets invested in the technology sector and another 17% in communications stocks.

Invesco S&P 500 Equal Weight Technology ETF (RSPT)

RSPT aims to create a truly diversified basket of tech stocks by allocating an equal amount of assets to every company in the index it tracks, which consists of 68 different stocks. This means that a relatively small company in the index gets the same exposure as a massive company. The fund has a reasonable 0.40% expense ratio.

ARK Innovation ETF (ARKK)

Unlike the previous ETFs, which are all passive funds, ARKK is actively managed by well-known investor Cathie Wood and her team. The fund's goal is to beat the market over time by investing in innovative and rapidly growing tech companies. ARKK's top holdings include Tesla, Roku, Coinbase, Roblox, and Block.

AXS Esoterica NextG Economy ETF

Roundhill Magnificent Seven ETF

MicroSectors FANG ETNs

Pacer Data and Digital Revolution ETF

These ETFs are also among the best-performing tech ETFs based on one-year returns.

Tech ETFs may be a good option for investors looking for high growth potential and diversification. They can smooth out some risks by owning a collection of tech stocks rather than just one, increasing the odds of earning higher returns while reducing risk.

What are the different types of technology ETFs?

Technology ETFs are a great way to invest in the technology industry, especially if you want to avoid stock picking. There are many different types of technology ETFs, each with its own unique focus and holdings. Here are some of the different types:

Sector-specific technology ETFs focus on a single technology industry, such as computer, semiconductors, software, networking, or Internet stocks. Some sector-specific ETFs may also concentrate on medical devices and biotechnology stocks. Vanguard Information Technology ETF (VGT) is an example of a sector-specific technology ETF, tracking the MSCI US Investable Market Information Technology 25/50 Index.

Global information technology ETFs allow investors to invest in the largest IT companies worldwide. These ETFs follow standards like the Global Industry Classification Standard (GICS) to identify companies in the IT sector. Examples include the iShares MSCI World Information Technology Sector ESG UCITS ETF and the Amundi MSCI World Information Technology UCITS ETF.

Thematic ETFs track a non-standardised industry group and a specific investment theme within the technology sector. These can include:

• Cloud technology ETFs: These focus on companies providing products or services related to cloud computing, such as the Fidelity Cloud Computing ETF (FCLD).
• Cybersecurity ETFs: These invest in companies that provide cybersecurity solutions, like the First Trust NASDAQ Cybersecurity ETF.
• Digitalisation ETFs: These track companies that are undergoing or facilitating digital transformation.
• Artificial Intelligence (AI) ETFs: These ETFs invest in companies at the cutting edge of AI technology, such as the Global X Artificial Intelligence & Technology ETF.

Broadly diversified technology ETFs hold dozens or even hundreds of tech stocks, often including the biggest names in Big Tech. Examples include the Technology Select Sector SPDR Fund and the iShares U.S. Technology ETF.

When choosing a technology ETF, it is essential to research the fund and its underlying holdings to ensure it aligns with your investment goals and risk tolerance.

How do I choose the right tech ETF for my portfolio?

Tech ETFs are a stable way to invest in technology without the risks of individual stocks. They are a good option for investors looking for high growth potential and diversification.

When choosing the right tech ETF for your portfolio, there are several factors to consider:

• Level of Assets: Choose an ETF with a minimum level of assets. A common threshold is at least $10 million. ETFs below this threshold may have poor liquidity and wide spreads due to limited investor interest.
• Trading Activity: Trading volume is a good indicator of liquidity. Generally, the higher the trading volume, the more liquid the ETF is likely to be.
• Underlying Index or Asset: Consider the underlying index or asset class the ETF is based on. For diversification, it may be better to invest in an ETF based on a broad, widely followed index.
• Tracking Error: Most ETFs track their underlying indexes closely, but some deviate. Choose an ETF with minimal tracking error.
• Market Position: The first ETF issuer for a particular sector often garners the most assets. Avoid ETFs that are imitations of an original idea.
• Expense Ratio: The expense ratio is an annual fee charged by the ETF, calculated as a percentage of your investment. For example, the Vanguard Information Technology ETF has a low expense ratio of 0.10%.
• Concentration: Some ETFs are top-heavy, with a high concentration in just a few stocks. For example, the Vanguard Information Technology ETF's top three holdings make up 47% of its total assets. If you want a more diversified basket of tech stocks, consider the Invesco S&P 500 Equal Weight Technology ETF, which allocates equal assets to each company in its index of 68 stocks.
• Passive vs. Actively Managed: Passive funds are designed to track an index of stocks, while actively managed funds aim to beat the market over time by investing in innovative and rapidly growing companies. The ARK Innovation ETF is an example of an actively managed ETF.
• Vanguard Information Technology ETF (VGT): Tracks a broad index of U.S. tech companies, with a low expense ratio of 0.10%. However, it is top-heavy, with a high concentration in Apple and Nvidia.
• Technology Select Sector SPDR ETF (XLK): Similar to Vanguard's ETF, with a slightly lower expense ratio of 0.09%. Also top-heavy, with 62% of total assets in the top 10 holdings.
• VanEck Semiconductor ETF (SMH): Tracks an index of semiconductor manufacturers, with a higher expense ratio of 0.35%. Nvidia is the top holding, making up about 20% of its assets.
• IShares Cybersecurity and Tech ETF (IHAK): Focuses on cybersecurity stocks, with a 0.47% expense ratio. Top holdings include Varonis Systems, Fortinet, and Palo Alto Networks.
• Invesco QQQ ETF (QQQ): The largest Nasdaq-tracking ETF, with a low expense ratio of 0.20%. While not a pure tech ETF, over 60% of its assets are invested in the tech sector. Top holdings include Apple, Microsoft, and Amazon.
• Invesco S&P 500 Equal Weight Technology ETF (RSPT): Aims for true diversification by allocating equal assets to each company in its index of 68 stocks. It has a reasonable expense ratio of 0.40%.
• ARK Innovation ETF (ARKK): An actively managed ETF focused on high-growth tech companies. Its top holdings include Tesla, Roku, and Coinbase.

Remember to do your due diligence and research specific funds and their underlying holdings before investing.

What are the top tech ETFs to buy in 2024?

Tech ETFs are a great way to invest in the technology sector without the risks associated with individual stocks. Here are some of the top tech ETFs to consider for 2024:

Vanguard Information Technology ETF (VGT)

Vanguard's VGT ETF is one of the largest and most highly-regarded sector-specific technology ETFs. With a low expense ratio of 0.1%, it offers broad exposure to the US tech sector by tracking the MSCI US Investable Market Information Technology 25/50 Index. While it may not be the most diverse, with Apple and Nvidia alone accounting for 30% of its holdings, it is a favourite among Morningstar analysts.

IShares U.S. Tech Breakthrough Multisector ETF (TECB)

For those looking to invest in cutting-edge technology, the iShares TECB ETF offers exposure to breakthrough technologies like robotics, AI, cybersecurity, genomics, and immunology. The fund is less concentrated than others, with its top 10 holdings accounting for 40% of the portfolio, and Apple only making up 4.4%. Morningstar analysts give it four stars and a gold badge.

Technology Select Sector SPDR ETF (XLK)

Ranked the number one technology ETF by US News, the XLK ETF offers exposure to the technology companies in the S&P 500. With an expense ratio of just 0.09%, it is a low-cost way to gain access to some of the biggest names in tech, like Apple and Microsoft. However, it is a fairly concentrated bet, with the top 10 holdings making up 62% of the total portfolio.

Fidelity MSCI Information Tech ETF (FTEC)

The FTEC ETF is ranked the second-best technology ETF by US News and is favoured by Morningstar analysts. It has performed well over the past market cycle, returning over 53% in 2023 and 22% year-to-date. The fund tracks the MSCI USA IMI Information Technology Index, which covers the entire US IT sector, including lesser-known tech companies like MeridianLink and nLight. However, Apple and Nvidia still dominate, with 61% in the top 10 names.

Fidelity Cloud Computing ETF (FCLD)

With the cloud computing market expected to grow at a rate of 21.2% per year between 2024 and 2030, the FCLD ETF is well-positioned to benefit from this growth. The fund invests in companies of all sizes that provide products or services to support the increased adoption of cloud computing. Morningstar analysts give it a gold badge, indicating high expectations for its future.

IShares Future Cloud 5G and Tech ETF (IDAT)

The IDAT ETF offers exposure to cloud computing on a global scale, investing in companies of all sizes from both developed and emerging markets. The portfolio includes well-known names like Nvidia and Broadcom, as well as less familiar companies like Arista Networks and Pure Storage. Morningstar gives it a gold badge and three out of five stars.

Frequently asked questions