Investors don't want to pay financial advisors high management fees to invest their money. However, they also don't want to dive into the world of picking individual stocks and potentially losing their fortunes or underperforming due to a few poor decisions.
For this reason, passive investing via ETFs is gaining tremendous momentum. An investor can build a portfolio of ETFs in just a few clicks of a button and get exposure to a diverse portfolio full of thousands or even tens of thousands of companies.
Shares of ETFs trade just like stocks and cost nothing more than the brokerage commissions, if any, plus a small annual management fee.
For the most part, we want exposure to the largest and best companies on the planet. However, maybe at some point, we've considered getting exposure to specific industries, like real estate investment trusts or tech. In this article, we will speak on some of the top exchange-traded funds whose purpose is to get you exposure to the information technology sector.
Tech stocks are extremely popular for several reasons. For one, artificial intelligence is making waves in the investment world right now, and everyone wants a piece of the pie. Many top-tier technology stocks expose you to this.
Secondly, innovation in the sector is accelerating rapidly, and many of the world's largest technology companies continue to drive strong earnings growth despite their gigantic sizes.
But you already know all this, which is why you're looking to find some of the best tech ETFs today. Let's go over some relevant funds. As always, these are not recommendations, simply my summary and thoughts to help get you started.
What are the best tech ETFs to buy today?
- Vanguard Information Technology ETF (VGT)
- Technology Select Sector SPDR Fund (XLK)
- iShares US Technology ETF (IYW)
- iShares Global Tech ETF (IXN)
Vanguard Information Technology ETF (VGT)
Let's start with the premiere technology ETFs here in the United States, with the first being Vanguards Info Tech ETF.
The fund has a whopping $53B in assets under management at the time of writing and has been around for nearly twenty years. Vanguard is often heralded as the lowest-cost ETF provider in the business and, as such, contains plenty of the best ETFs on the planet.
The fund is an index fund aiming to track the MSCI US Investable Market Information Technology Index. Because the fund is an index fund and not an actively managed technology ETF, this allows its fees to come in relatively low, with a management expense ratio of only 0.10%. This means you'll pay just $1 annually for every $1000 invested in the fund.
Considering this fund has over 320 holdings, this is a small price to pay regarding the diversification it gives you. Not to mention, the top holdings in the fund contain many of the most prominent blue-chip companies on the planet, like Apple (AAPL), Microsoft (MSFT), NVIDIA (NVDA), Broadcom (AVGO), and Adobe (ADBE).
It's important to note that although this fund has 320 holdings, it is top-heavy. Apple, Microsoft, and NVIDIA comprise more than 43% of the ETF. Although it's not necessarily bad that you're putting the bulk of your funds in some of the best tech companies on the planet, it's certainly something to consider from a risk perspective.
The fund is a pure-play North American tech ETF and mostly has large-cap exposure and very little exposure to small-caps.
It has a distribution yield of 0.54% at the time of writing. However, if you're looking for technology ETFs, you are likely looking for growth, not income.
Overall, this is one of the better technology ETFs in the country and is certainly the largest.
Technology Select Sector SPDR Fund (XLK)
Another premiere technology ETF is the Tech Select Sector ETF. This fund isn't quite as large as the Vanguard fund, but with assets under management of just under $49B, it's pretty close and is certainly nothing to balk at.
Much like VGT, the fund has expenses of 0.10%, meaning you'll pay only $1 a year for every $1000 invested. This low-fee nature makes these funds outstanding options for tech exposure.
This fund is also an index fund but tracks a different index. XLK aims to track the Technology Select Sector Index, and the makeup of this fund is very different from Vanguards.
For one, the fund only contains 68 holdings instead of 321. Secondly, it is much more heavily weighted into the top companies, with over 50% of its NAV being invested in Microsoft, Apple, and NVIDIA. Of note, this fund's top holding is also Microsoft; however, Apple and Microsoft are relatively equally weighted inside the fund, having only a percent or two difference in allocation.
This fund is also a North American pure-play, with over 99% of its assets invested in US-based technology companies. It pays a relatively small dividend at 0.62%.
In terms of the performance of these two giant ETFs, it has been fairly interesting. Over the long term, despite XLK having a much more concentrated portfolio in large-cap tech companies, it has only outperformed VGT annually by about 0.2%.
However, although both funds have excelled in the last 1, 3, and 5-year periods, this one is the clear standout due to its more concentrated focus, outperforming on all marks.
As always, past performance is never an indication of future results. However, both of these funds give you a bit of a different flavour when investing in broad-based technology ETFs. You just need to figure out which one is right for you.
iShares US Technology ETF (IYW)
Now that we have the two mega technology ETFs out of the way, we can start focusing on the smaller ones with more of a unique focus. Keep in mind, however, that with assets under management of $11B, iShare's technology ETF is far from small.
This ETF is also an index fund, and the fund's investment objectives are to track the Russell 1000 Technology RIC 22.5/45 Capped Index. The numbers concern a particular stock's maximum allocation towards the index. The 22.5 means that no individual company in the index can have a weight greater than 22.5%, and the 45 means that the allocation of companies that make up more than 4.5% of the index cannot total more than 45%.
This is relatively complex jargon, and really, what you need to know is that this will be a fund that is a bit less concentrated on the mega-caps due to the fact it simply has to be.
For this reason, its overall holdings makeup is a bit different than the others we've discussed. Although Apple and Microsoft still sit in the top 2 spots, their weightings are much lower, at around 16% each. From there, we have Alphabet (GOOG and GOOGL), Meta Platforms (META), NVIDIA (NVDA), Advanced Micro Devices (AMD), and Broadcom (AVGO).
In total, it has around 140 holdings.
The fund has a management expense ratio of 0.4%, which is quite high for a passively managed index fund. You'll pay $4 annually for every $1000 you invest with the ETF. In addition, its dividend is only around 0.29%, which represents the difference in fees compared to the funds above.
Has this funds strategy, and higher fees, been worth it? Yes and no. It has kept pace with XLK over the years, even after costs have been accounted for, and has outperformed Vanguard's more broad-based technology ETF.
Will it continue to do so in the future? Who knows. But for now, if you're looking for a fund that caps the overall weightings of companies inside its holdings to reduce concentration risk, this is a peek.
iShares Global Tech ETF (IXN)
I decided to include this fund on the list primarily because not every investor is solely looking for US-based technology companies. With IXN, iShares brings an international element for those who want diversification outside the United States.
The fund has assets under management of $3.5B, making it the smallest fund on this list. This isn't surprising, considering many investors are satisfied simply owning the top tech companies in the United States. Has it been a detriment in terms of performance? We'll get to that in a bit.
The fund has expenses of 0.41%, making it the highest fee fund on this list. However, this is not surprising considering it is more of a niche ETF and expands outside of North America in terms of holdings. You'll often pay more fees with funds like this.
It contains 130 holdings, and for the most part, it is much the same companies we've seen in any of these other funds. Where it differs is the international exposure. The fund contains positions in Taiwan Semiconductor Manufacturing Co (TSMWF), Samsung Electronics (SSNLF), SAP SE (SAPGF), and many more international companies.
Overall, the fund is still heavily North American, with over 81% of its holdings being located there. However, the 20%~ international exposure is a nice touch to anyone seeking it.
With a dividend of 0.59%, this isn't going to be a fund you're looking at to earn a passive income stream. You should be looking to this for total returns.
And speaking on that, has the international exposure helped this fund drive stronger returns, or has it cost it?
With annualized returns of 18% over the last ten years, we wouldn't exactly say this has been a poor performer. However, it is the worst-performing fund on this list. Investing in international equities is complex, and thus far, simply choosing North American tech stocks has been the best choice.
However, this is far from guaranteed in the future, and we could see international equities make a return in the tech sector. It's up to you as to whether or not you want exposure to it.
Overall, these funds should provide you with excellent exposure to the technology sector
Many types of NASDAQ ETFs are out there that provide solid exposure to technology companies. However, many companies trade on the NASDAQ that are not tech-related at all, like Amazon (AMZN). So, the funds on this list provide a strong alternative for those who only want tech exposure.
As always, past returns on these funds are never guaranteed for the future, and even though exposure to the tech giants has paid off this far, it doesn't mean it will be moving forward. This is an important element to understand when it comes to investing.
You need to determine your overall risk tolerance and understand the risk factors when buying these ETFs. These ETFs will be more volatile than, say, a blue-chip fund tracking the S&P 500.
If you're looking to go the passive investing route and choose ETFs over individual stocks, these are some solid ones to get started with. ETFs are a great financial instrument for anyone looking to get started investing.
