Whether you are looking to diversify, stabilize, or improve your portfolio, you should look into the technology space. This article discusses how you can use the best tech ETFs to break into the tech industry and get excellent returns as an investor.
Key Takeaways
Are you in a hurry? Check out the key takeaways below:
- Tech ETFs allow you to invest in the technology industry while ensuring diversification and lower risk.
- Technology-focused ETFs have outperformed themselves by their high standards in recent times due to the improved adoption of new and existing techs.
- The top five ETFs in the U.S. recorded a 71% increase in AUM and 37% in total asset returns in 2020.
- The best tech ETFs to invest in are XLK, ARKK, FDN, VGT, SOXX, RYT, and XSW.
- Consider factors like the sub-sector of the fund, performance, and expense ratio to identify a good tech ETF for your portfolio.
Tech ETFs Explained
Tech ETFs offer you broad exposure to the best investment opportunities in the technology industry, in the form of bonds, mutual funds, and stocks combined. You can either build an entirely different tech portfolio or incorporate the tech industry into your existing portfolio while ensuring diversification and lower risk than isolating stocks.
While these investment tools are not entirely new, tech ETFs have outperformed themselves by their high standards in recent times. But the more exciting part is that this growth does not seem to be stopping anytime soon. From all indications, tech is well-positioned to break into and take over other areas of the economy we least expect.
For ease of identification, we can classify the tech sector into three major groups (GICS Classification). The first group comprises software and I.T. services companies. The second group includes technology hardware and equipment companies, including communications, electronic components and instruments, storage and peripherals, and other technology hardware. The last group is the “chip” companies that manufacture semiconductors and semiconductor equipment.
The ideal tech ETFs must invest in these three sectors to ensure diversification and adequate risk management. Fortunately, my list of the best tech ETFs meets this need, as you will find in the following sections of this post.
Why Buy Tech ETFs?
While technology has been pivotal to development over the years, recent happenings have added to the relevance, especially in the past few years. The COVID-19 pandemic, for example, is responsible for the creation and advancement of tons of technologies. In addition, more people and businesses have adopted both new and existing techs in the last few years. As a result, many large-cap tech stocks became even more dominant, and the upcoming brands grew way faster than expected.
Let’s put some perspective on this. The Semiconductor Industry Association (SIA) recently announced a 27.6% annual increase in the global sales of semiconductors. The total sales in the third quarter of 2021 stand at $144.8 billion – a 7.4% increase from the second quarter. Similarly, the microchip sector recorded $48.3 billion total sales in September – a 27.6% annual increase and 2.2% monthly increase.
Interestingly, the tech exchanged-traded funds (ETFs) also stepped up within this period. For example, the top five ETFs in the United States (in terms of market cap) have over $34 billion in assets under management (AUM) as of August. This translates to a roughly 71% increase in AUM and 37% in total returns since the start of 2020.
Overall, the track record of tech-focused ETFs indicates they can be your gateway to higher returns at lower risks. The next section contains my list of the best tech ETFs you should consider.
7 Best Tech ETFs You Should Consider
1. Technology Select Sector SPDR Fund (XLK)
Launched in 2009, the Technology Select Sector SPDR Fund (XLK) is a broad tech ETF that invests in various industry sectors. It has been one of the largest and cheapest funds in its segment and focuses on the Technology Select Sector Index. It is ideal for investors who want to break into only large-cap companies.
XLK’s total asset under management (AUM) is currently $49,55 billion, with an expense ratio of 0.12%. 50% of XLK’s 77 holdings have an ESG rating of AAA or A.A. (MSCI). You can expect this fund to withstand interruptions resulting from environmental, social, and governmental issues.
2. ARK Innovation ETF (ARKK)
Unlike other index-tracking funds on this list, ARK Innovation ETF (ARKK) is man-managed by Ark Invest founder, CEO, and CIO, Catherine Wood. But, this does not take anything away from the potentials of this ETF.
It has roughly $9 billion assets under management, returning a dividend yield of 0.2% and with an expense ratio of 0.75%. Interestingly, ARRK has outperformed other technology-focused ETFs over the last few years. Also, Wood is big on Tesla, which explains why over 10% of ARKK’s assets are currently in TSLA, with another roughly 9% in Invitae (NVTA).
For more on ARKK, check out the issuer’s website.
3. First Trust Dow Jones Internet Index Fund (FDN)
The First Trust Dow Jones Internet Index Fund (FDN) is the third entry on my list of the best tech ETFs. The fund comprises 40 U.S. companies, including Amazon, Facebook, Zoom, DOCU, and Netflix. As the name suggests, roughly half of FDN’s yearly returns come from the internet, including internet services and e-commerce.
It currently has over $10 billion assets under management and an expense ratio of 0.51%. Also, the MSCI rating of FDN is 4.39 out of 10, which means it is fairly immune to long-term risks and opportunities from environmental, social, and governance factors.
It is issued by First Trust, and it monitors a market-cap weighted index of the biggest internet companies in the United States.
4. Vanguard Information Technology ETF (VGT)
The Vanguard Information Technology Index Fund (VGT) is an open-ended, American tech-ETF with the highest diversity in terms of its holdings. VGT invests in more small- and micro-cap companies than other ETFs in its category and monitors the MSCI US Investable Market Information Technology performance.
The expense ratio is 0.10%, with over $60 billion assets under management. Of the 338 holdings in its books, 43% receive an MSCI ESG Rating of AAA or AA, which means long-term risks and opportunities from environmental, social, and governance factors do not affect them.
VGT will be a decent tech ETF for your portfolio, considering its medium-risk outlook and very low expense ratio.
iShares PHLX Semiconductor ETF (SOXX) will be an excellent fit for your portfolio if you want a fund that purely invests in the semiconductor (chips), including manufacturers of semiconductor materials and providers of equipment or services related to semiconductors.
There are currently 30 holdings in SOXX’s books, including industry top names like Intel, Nvidia, Texas Instruments, AVGO, and Qualcomm. Roughly 41% of SOXX’s holdings receive an ESG rating of 8.14 out of 10, according to MSCI. It has over $9 billion in assets under management, with a 23% turnover rate. The expense ratio currently stands at 0.43%.
SOXX is previously known as the iShares PHLX Semiconductor ETF and is issued by iShares.
6. Invesco S&P 500 Equal Weight Technology ETF (RYT)
Investors looking to add a pure blend of S&P 500 stocks to their portfolio should strongly consider Invesco S&P 500 Equal Weight Technology ETF (RYT). The 75 stocks in RYT’s books are in S&P 500’s information technology sector, and these include the strongest American companies.
Only a fraction of RYT’s overall assets spread across its top ten holdings, which means it does not have the normal market-like portfolio. The yearly average return rate of RTY since its launch in 2006 is 14%, and the expense ratio is 0.40%. The MSCI ESG score of the holdings in this fund is 8.07 out of 10, indicating a solid resilience to risks and opportunities related to environmental, social, and governance issues.
Check out the issuer’s website for more on RYT.
7. SPDR S&P Software Services ETF (XSW)
I am rounding up this technology ETF list with the seventh entry – the SPDR S&P Software Services ETF (XSW). XSW is another tech ETF focusing on the S&P market, covering the I.T. consulting, data processing, application software sub-industries.
Since its inception in 2011, XSW has added over 180 stocks to its books, and its assets under management are currently worth $538.67 million. XSW’s yearly average return is around 22%, and the expense ratio is 0.35%.
Suppose you are interested in a portfolio focusing on the software and services (with a slight emphasis on the latter) part of the U.S. equity market. In that case, you should consider adding XSW to the portfolio.
It is issued by the State Street Global Advisors (SPDR).
How to invest in Tech ETFs
The most crucial investment rule also applies in the case of tech ETFs: diversification. Do not allow your love for a certain ETF to override the need for adequate diversification. Instead, keep your portfolio well-diversified, and ensure you invest in the right sub-sectors.
For example, you can decide to invest in software companies only, considering they are one of the market’s hottest segments at the moment. You can expect high margins with sales growth, but this will come with low incremental costs. Likewise, investing in the semiconductor industry is another great idea, provided you can choose a fund that focuses only on that group. This will help maximize your profits.
A mix of both scenarios is also possible, especially if you want a more broadly diversified tech ETF portfolio.
Final Verdict
Tech-focused ETFs offer you a balanced and straightforward avenue to invest in tech, especially when you consider the explosive nature of the industry. The risks are limited, and the returns are relatively better than individual stocks.
Understandably, investing in all tech ETFs you come across might not be feasible. That is why you should assess the crucial aspects of each ETF to identify those that correlate most with your investment goals.
Know the types of industries your ETFs are investing in (sub-sector), how well they have performed over time (investment track record), and the cost of funding it annually (expense ratio). These will help you arrive at a balanced assessment of these tech ETFs.
Ready to enter the world of tech ETFs? You will find my list of the best tech ETFs for the long-term quite useful.
Have a great one!