While the energy sector was a success story in 2022, the tech sector’s performance was downright tragic. Among some of the biggest losers last year were names such as chipmaker Nvidia Corp. (ticker: NVDA), electric vehicle icon Tesla Inc. (TSLA) and Facebook parent Meta Platforms Inc. (META) – all of which slumped 50% or more in 2022.
But 2023 is shaping up to be a much different story. Tech has essentially put the entire U.S. stock market on its back, leading the way higher with a stunning 26.7% advance for the Nasdaq and an impressive 12% gain for the S&P 500 through June 9. Those same names that many considered as good as mud in 2022 have turned the tables in dramatic fashion. Nvidia, for one, has jumped out to a 165.4% gain in 2023, and Meta Platforms is up 120.2%, both as of June 9.
“When the only investments performing year to date are the largest technology companies, chasing the story is easy,” says Chris Berkel, investment advisor and president of AXIS Financial in Edmond, Oklahoma. “It’s what everyone sees, but past performance isn’t indicative of future results, or General Electric would still be one of the largest companies on Earth.”
For simplicity and the assurance that you won’t miss out on all the fun, exchange-traded funds, or ETFs, allow you to hold many of the biggest names in Big Tech in a single ticker. With the capacity to hold dozens or even hundreds of tech stocks, ETFs can be a smart alternative to stock picking even in the best of times. But you still need to do your research to find the best tech ETF for your portfolio.
If you’re thinking 2023’s rally has staying power, or if you’re looking much farther out on the horizon, here are some leading tech ETFs to consider:
- First Trust NASDAQ Cybersecurity ETF (CIBR)
- Invesco S&P 500 Equal Weight Technology ETF (RYT)
- Invesco QQQ Trust (QQQ)
- Vanguard Information Technology ETF (VGT)
- Defiance Quantum ETF (QTUM)
“Considering the current uncertainty in both the economy and equity markets, it is important to be extremely targeted within the technology sector due to the inherent risks associated with a slowing economy and rising interest rates, and their impact on cyclical sectors,” says Daniel Milan, managing partner and investment advisor representative at Cornerstone Financial Services in Southfield, Michigan. To do this, he suggests targeting an area of tech that’s becoming a staple on corporate budgets – namely, cybersecurity.
“Cybersecurity checks that box in spades as it has quickly become not only a requirement for businesses, but an ever-increasing expense,” Milan says.
He therefore likes CIBR as a tech ETF. While it primarily holds software and IT companies, it also branches out from pure tech to more diversified industries, including aerospace and defense with companies like Thales SA (HO.FP), which manufactures defense and aerospace equipment, and military contractor Booz Allen Hamilton Holding Corp. (BAH).
Among the names that you’d be more likely to expect to find are Broadcom Inc. (AVGO), the fund’s largest holding by weighting, Palo Alto Networks Inc. (PANW), Fortinet Inc. (FTNT) and Cisco Systems Inc. (CSCO).
With only 35 holdings, this is still a fairly targeted play in the tech sector, but that only helps it pair better with other holdings in your portfolio.
Invesco S&P 500 Equal Weight Technology ETF (RYT)
The tech sector tends to be dominated by giants, and when you couple that with market-cap weighted ETFs, you tend to get top-heavy funds.
“Market-cap weighted ETFs weigh the underlying holdings based on the size of the company, meaning larger companies receive a disproportionate weight of investment dollars,” Berkel says. He points to the Invesco NASDAQ 100 ETF (QQQM) as an example, where for every dollar you invest, roughly 13 cents goes to Microsoft Corp. (MSFT) and only a penny to Texas Instruments Inc. (TXN).
To mitigate this, Berkel recommends looking for ETFs with tech names in the portfolio but different weighting strategies. “This impact means that returns in market-cap weighted ETFs are dictated by fewer and fewer companies,” he says, which “represents a massive concentration risk.”
To avoid that risk, he recommends looking for ETFs with different weighting schemes. For example, RYT takes an equal-weight approach, meaning it gives each holding a roughly equal weight, regardless of the company’s size. If you look under the hood, you’ll see that even the largest holding, Nvidia, gets only 1.69% of the fund’s total assets. The result of this equal-weight approach is a far more diversified portfolio with only about 15% of its total assets in the top 10 holdings.
So if you’re looking for a truly diversified play on the tech sector with a reasonable expense ratio of only 0.4%, RYT deserves a look.
If you want more of a lean into tech than a full-on cannonball, you might like QQQ.
Though not technically a tech ETF, this $191 billion fund from Invesco is one of the five largest exchange-traded products in the U.S. and an incredibly liquid way to invest in the top technology stocks of 2023. It’s not exclusively a sector fund, as it’s benchmarked to the Nasdaq-100 index, which holds the biggest 100 or so firms on the Nasdaq exchange.
Since that index has always been tech heavy and excludes traditional U.S. stocks like JPMorgan Chase & Co. (JPM) and Johnson & Johnson (JNJ) that are on the New York Stock Exchange, the result is a fund that’s biased toward tech. Specifically, nearly 60% of its assets are in the tech sector versus 28% for the S&P 500.
Vanguard Information Technology ETF (VGT)
The largest truly sector-specific technology ETF is VGT, with some $53.1 billion in net assets at present. Just as QQQ has its quirks by also including some stocks outside of Big Tech mainstays, VGT goes the other way with a massive prioritization of larger tech stocks.
Due to its market-weighting system, where the bigger companies represent more of the portfolio, 62% of the fund’s total assets are in the top 10 positions alone – with Apple Inc. (AAPL) and Microsoft Corp. (MSFT) at 41% between the two of them.
On the plus side, this leading technology ETF is cheap, charting just 0.1% annually in fees, or $10 on every $10,000 invested. But clearly you’re not getting a lot of sophistication here.
That said, Morningstar’s research team is bullish on this fund, giving it five out of five stars and a gold medal, indicating the researchers have the most conviction that VGT will outperform a relevant index or most peers over a market cycle. VGT is, in fact, the only technology ETF to earn both five stars and a gold medal as of early June 2023.
Defiance Quantum ETF (QTUM)
Conversations about technology today often involve discussions of artificial intelligence and machine learning. These transformative technologies are shaping industries beyond tech and changing the way people live, work and play.
If your idea of a tech ETF is one focused on these cutting-edge technologies, QTUM may be the one for you. The fund page states that it targets “companies on the forefront of machine learning, quantum computing, cloud computing and other transformative computing technologies” by tracking the BlueStar Quantum Computing and Machine Learning Index (BQTUM), which in turn tracks 71 global stocks of all sizes.
Of those 71 stocks, you’ll find a mix of familiar names, like Nvidia, Mitsubishi Electric Corp. (6503.T) and Marvell Technology Inc. (MRVL), alongside some perhaps less familiar ones, like quantum computing hardware and software design company IonQ Inc. (IONQ) and Japanese semiconductor manufacturer Renesas Electronics Corp. (6723.T).
QTUM also ranks in the least expensive fee quintile among its peers, according to Morningstar, with a 0.4% expense ratio. It is a smaller fund with only $145.7 million in assets and an average daily trading volume of about 22,000 shares, which could present a liquidity risk. But Morningstar gives it five stars and a silver badge, indicating a high conviction that it will outperform over a market cycle.