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The technology sector is moving quickly, so if you want to invest here it may make sense to buy a tech exchange-traded fund (ETF). A technology ETF is an easy way to build a technology portfolio, allowing you to play the sector if you think it’s going to move higher – and you can do this without analyzing the individual companies. An ETF also provides diversification, reducing your risk compared to buying a few individual stocks.
Here are some of the best technology ETFs to consider for your investment portfolio, with data as of April 4, 2024.
What are the main types of technology ETFs?
The technology sector is large and is called ‘information technology’ for classification purposes, as part of the GICS classification system. That system divides the technology sector into three major industrial groups:
- Software and services – This industry group includes software companies and IT service providers.
- Technology hardware and equipment – This group includes three main areas: communications equipment; technology hardware, storage and peripherals; and electronic equipment, instruments and components.
- Semiconductors and semiconductor equipment – This group includes the “chip” companies that make semiconductors and the companies that produce supporting equipment.
If you’re looking for broad exposure to technology, you can find funds that invest across the sector, giving you a diversified cross-section of players.
Best Tech ETFs
1. Best Software and Services ETF
iShares Comprehensive Tech-Software Sector ETF (IGV)
This ETF tracks an index composed of North American software companies and interactive media companies. Top holdings include Salesforce, Microsoft and Adobe.
- 5-year return (annualized): 14.6 percent
- Cost ratio: 0.41 percent
- Dividend yield: 0.01 percent
2. Best Internet ETF
First Trust Dow Jones Internet ETF (FDN)
This ETF aims to match the investment results of the Dow Jones Internet Composite Index, which tracks shares of American internet companies. The largest holdings include Amazon, Netflix and Meta Platforms.
- Returns over 5 years (annualized): 7.5 percent
- Cost ratio: 0.52 percent
- Dividend yield: n/a
3. Best Semiconductor ETF
iShares Semiconductor ETF (SOXX)
This ETF tracks an index composed of U.S.-listed semiconductor industry stocks. The top positions include NVIDIA, Broadcom and Advanced Micro Devices.
- Returns over 5 years (annualized): 30.4 percent
- Cost ratio: 0.35 percent
- Dividend yield: 0.6 percent
4. Best Diversified Technology ETF
Vanguard Information Technology ETF (VGT)
This ETF tracks a benchmark index of the information technology sector, giving investors a diversified cross-section of the sector. Top positions include Apple, Microsoft and NVIDIA.
- Returns over 5 years (annualized): 22.2 percent
- Cost ratio: 0.10 percent
- Dividend yield: 0.7 percent
Investing in 5G technology
Another technology area expected to see substantial growth in the coming years is 5G telecommunications. 5G refers to the fifth-generation mobile network that is expected to be drastically faster than previous generations, allowing users to connect more easily in more and more ways.
While we typically think of smartphones as the main beneficiary of this innovation, other areas will also benefit as more and more things become connected to the internet. Companies like Apple and Verizon seem well positioned to benefit from the rollout of 5G, as do carmakers like Ford and Tesla or semiconductor companies like NVIDIA or Micron Technology.
But if you’re not exactly sure which companies have the best 5G play, these ETFs might be worth a look.
- Defiance 5G Next Gen Connectivity ETF (FIVG): This ETF invests in dozens of companies that are likely to benefit from the growth of 5G. The fund includes 50 companies and has an expense ratio of 0.30 percent.
- First Trust IndXX NextG ETF (NXTG): This fund takes a slightly more diversified approach, with just one of the 99 investments accounting for more than 2 percent of the portfolio’s assets. It comes with a hefty expense ratio of 0.70 percent per year.
- AXS Esoterica NextG Economy ETF (WUGI): This ETF is more concentrated than the first two, with just 32 holdings and about 65 percent of the fund in the top 10 holdings. It will cost more because of its active approach, with an expense ratio of 0.75 percent.
What to look for with an ETF
When investing in ETFs, it is helpful to look at some aspects of each ETF so that you actually buy what you think you are buying. Here are three important things to pay attention to:
- The subsector – Each subsector can respond differently to developments in the industry. For example, software companies will respond differently to growing demand than semiconductor companies, which often have to deal with the cyclicality of that subsector. So you need to know what kind of companies your ETF owns.
- The investment track record – The ETF’s track record can give you an indication of how the fund might perform in the future, although there are no guarantees. Has the ETF outperformed or underperformed the sector? The subsector can strongly influence the track record, because not all tech subsectors perform the same.
- The expense ratio – Pay attention to the expense ratio, which tells you how much it costs annually to own the fund, as a percentage of your total investment in it.
Finally, it’s worth noting that larger ETFs tend to have lower expense ratios because they can spread the costs of running the fund over more assets. So the cheapest funds can often be the largest funds, and a low expense ratio is an important measure of what makes a top ETF.
How to Invest in Technology ETFs
An ETF can make it easier for individual investors to invest in the technology sector, but because of the different industry dynamics at play, you still need to know some of the subsectors you’re investing in. While some sectors are doing well, others may be more cyclical and have more peaks and troughs, depending on their specific dynamics.
The above ETFs give you a highly liquid way to invest in the technology sector, but you should carefully consider which sectors you invest in. If you want to invest in an upturn in the notoriously cyclical semiconductor industry, you may want a fund that focuses solely on that industry group. If you’re right, you could enjoy even greater profits than you would earn with a more broadly diversified technology ETF.
Likewise, you may want to invest in one of the most profitable areas of the market: software companies. The great appeal of software is that these companies can operate with huge margins as their revenue grows. Because the incremental costs of selling software are low, a large portion of each additional dollar of sales can contribute to pre-tax profits.
In short
Investors looking for exposure to the technology sector have a number of different options for playing it, from funds that invest in sub-sectors to funds that invest across the entire sector. So it is important to know which sector you are investing in and what potential risks and returns each ETF offers. For this reason, some investors stick to broadly diversified index funds, such as those based on the Standard & Poor’s 500 index, and don’t worry too much about the ups and downs of a sector.
Please note: Bank interest Brian Baker also contributed to an update to this story.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making any investment decision. In addition, investors are advised that the past performance of investment products does not guarantee future price increases.
