Technology is advancing at a faster rate than ever and there's no better way to profit from it than through top tech ETFs.
Technology ETFs (Exchange Traded Funds) are baskets of tech stocks that you can buy all at once just like a security on the stock market. They offer investors a way to diversify their portfolios while investing in the best technology companies in the market. (Over the past decade the tech sector has outperformed almost every other sector… so it's not a bad place to be.)
ETFs are also better than mutual funds because of 2 reasons:
- ETFs are passively managed
- Mutual funds have higher fees
What this means is that with an ETF you won't need to worry about human error. Also, you'll just inherently be saving money through fees.
This post will cover the unique attributes of the technology industry, the pros and cons of tech ETFs, and list some of the best tech ETFs on the market today. You'll see how you can capitalize on the best technology stocks in the world without being too heavily concentrated. Let's dive right in.
Understanding the Tech Sector
The tech sector refers to a group of businesses involved in all things technology-related. Nowadays, with technology so prevalent in society, it's not hard to look around and see how tech intertwines with our lives. In fact, it's hard to pinpoint anything that DOESN'T involve technology.
Tech is so diverse that even within tech, there are a few subcategories.
- Personal computers
- Mobile phones / smartphones
- Cloud computing
- Database management
- Enterprise software creation
- Artificial intelligence
- Internet of things
- Interactive media
What makes the tech sector unique is how much it's tied to economic growth. In almost every country, how fast they grow and expand is tied to how innovative their tech industry is. However, what this means is that if economic growth stalls, technology companies are more heavily exposed. Still, tech is often the most attractive destination for investors looking at what to invest in within any given economy. Some tech companies you probably know that drive crazy growth are: Apple, Facebook, Google, Netflix, Microsoft.
Another unique trait that technology companies possess is their ability to create business lines out of seemingly nowhere. Take Google for example. What started off as a simple web browsing business now has TONS of business lines including Google Cloud, Google Photos, Gmail, Google Maps, Google Play, and more! Each one of these business lines brings in revenue and moves the company forward. In no other sector is this kind of growth sustainable.
Pros and Cons of Tech ETFs
Before diving into any investment, it's important to understand its advantages and disadvantages. Here are the pros and cons of tech ETFs.
- Technology companies have the ability to generate money just from an idea. What this means is that companies can quickly grow and realize a profit before being well established.
- Technology drives growth in the world. At the end of the day, if you believe in the future of the world, then tech is where you want to be. With society advancing at the rate it is today, it's hard to envision a world where tech won't be at the forefront of it all.
- Tech IPOs have the potential to receive huge amounts of capital very quickly. What this means is that you can realize a return on your investment very soon if you pick the right tech company to buy. (With ETFs, you'll just buy them all!)
- Depending on what you're investing in, the tech industry can be hard to understand at times. Yes you may have a broad understanding of what artificial intelligence is… but do you know EXACTLY how the AI company you're investing in makes its money?
- Because of the nature of rapid growth in the tech industry, new ideas will be emerging everyday that could phase out old ones. This means that the tech industry is especially prone to market volatility. To invest in tech ETFs, you'll probably need to stomach a lot of ups and downs.
- Tech stocks are priced really high. Compared to other industries, the tech sector has extremely high valuations meaning if it crashes….. it will crash hard. Just look at Tesla nowadays… a 300+ PE ratio!!! Complete madness to most investors, yet people keep buying it.
Top Tech ETFs of 2021
If you've done your research on the tech industry, understand the pros and cons, and want to go forward with investing in it, then these are the tech ETFs you'll definitely want to check out.
- Assets Under Management: $41.90B
- Expense Ratio: 0.10%
- Average Daily Volume: 511K
- Total Return (To Date): +748%
- Issuer: Vanguard
Incepted in 2004, VGT focuses heavily on the information technology segment of tech. It's also one of the most diverse technology ETFs available (including more micro and small-cap stocks than other tech ETFs). What makes VGT unique is that it's extremely low-cost and exposes investors to the whole United States tech economy. For a cheap way to diversify into the US tech market, VGT gets the job done.
- Assets Under Management: $44.37B
- Expense Ratio: 0.12%
- Average Daily Volume: 7M
- Total Return (To Date): +345%
- Issuer: SPDR
Founded in 1998, XLK aims to track all the technology stocks in the S&P 500. XLK is known for being heavily concentrated with top holdings in Paypal, Intel, and Adobe (at the time of this writing). For a long time, XLK was the cheapest and largest fund that covered the US technology market.
- Assets Under Management: $143.92B
- Expense Ratio: 0.20%
- Average Daily Volume: 39M
- Total Return (To Date): +594%
- Issuer: Invesco
Created in 1999, Invesco QQQ aims to track the Nasdaq-100 index. Something unique about QQQ is that it excludes financial companies and is market-cap weighted. What this means is that QQQ will generally go up and down corresponding to the largest cap tech players in space. As of right now, almost 50% of QQQ is comprised of IT companies, with the rest of its holding being split amongst sectors like communications, healthcare, and consumer/discretionary.
- Assets Under Management: $130.7M
- Expense Ratio: 0.18%
- Average Daily Volume: 22K
- Total Return (To Date): +138%
- Issuer: iShares
Founded in 2018, IETC is the youngest ETF on this list… but don't let its age fool you. IETC is a market cap-weighted fund of all-sized technology businesses in the United States. The crazy thing about this fund is that it uses machine learning and AI to help choose its stocks. The artificial intelligence scans through annual reports and identifies which companies are considered “evolved.” These companies are then put under scrutiny before being added to the fund. For an actively managed portfolio of new AI-based investments, IETC boasts a cheap expense ratio.
- Assets Under Management: $25.52B
- Expense Ratio: 0.75%
- Average Daily Volume: 2.9M
- Total Return (To Date): +500%
- Issuer: ARK
Incepted by Cathie Woods in 2014, ARKK has been performing extremely well in the past year (2020). Of course, past performance doesn't guarantee future results, but there are plenty of reasons to be optimistic about ARKK's future. ARKK is an actively managed fund that takes concentrated positions in “disruptive innovation.” Disruptive innovation is defined as a new technology that could potentially change the way the world looks. For example, in 2020 ARKK allocated a large number of its total assets to Tesla… and it paid off. Though risky, ARKK also has the potential to generate huge returns.
- Assets Under Management: $3.68B
- Expense Ratio: 0.46%
- Average Daily Volume: 36K
- Total Return (To Date): +643%
- Issuer: iShares
Founded in 2001, IGM offers investors exposure to a wide scope of companies (with over 250 securities in total). Though its daily volume is only in the 5 figures, IGM could still play a part in any long-term portfolio. If you're an investor looking for a way to access the tech industry at large, IGM is for you. It should be noted that even though there are lots of companies in IGM's portfolio, it is still pretty heavily concentrated towards tech giants like Apple, IBM, and Microsoft.
- Assets Under Management: $526.36M
- Expense Ratio: 0.35%
- Average Daily Volume: 51K
- Total Return (To Date): +601%
- Issuer: SPDR
The SPDR S&P Software & Services ETF is special in that it offers investors an extremely narrow focus on one corner of the technology industry: software and services. Within this sub-sector, XSW holds stocks that have exposure to internet software, data processing, and IT consulting companies. Because of its targeted approach, XSW probably doesn't have a part in a long-term portfolio but is great for a tactical high-conviction short-term play.
- Assets Under Management: $10.81B
- Expense Ratio: 0.51%
- Average Daily Volume: 224K
- Total Return (To Date): +1078%
- Issuer: First Trust
Founded in 2006, FDN is designed to track the largest and most actively traded internet stocks in the United States. Something unique about FDN is that to be included in its portfolio, 50% of a company's revenue must be derived from the internet. Though it may not be a great diversified hold, if you have lots of convictions in internet stocks, this ETF may be the one for you.
In the 21st century, there's no industry that advances as fast as tech. What were dreams yesterday are realities today and the future holds innovations that we can't even begin to conceive of right now! The number of millionaires whose wealth was built off tech is countless. The best way to capitalize on all this extreme growth is through tech ETF investing.
Of course, there are considerations like the fact that tech is (generally speaking) a volatile industry and that a lot of technologies may fail before one succeeds… but if you're willing to take part in the action, some of the top tech ETFs to check out are:
- Vanguard Information Technology ETF (VGT)
- Technology Select Sector SPDR Fund (XLK)
- Invesco QQQ Trust (QQQ)
- iShares Evolved U.S. Technology ETF (IETC)
- ARK Innovation ETF (ARKK)
- iShares Expanded Tech Sector ETF (IGM)
- SPDR S&P Software & Services ETF (XSW)
- First Trust Dow Jones Internet Index Fund (FDN)
As always, be sure to do your due diligence before delving into your bank accounts and plowing money into an investment. I am not a financial advisor and do not guarantee any returns in the stock market. That being said… once you've reached a high enough point of conviction, don't wait any longer! Who knows, maybe you'll ride the next big wave of technological innovation with one of these ETFs…