Best technology ETFs

The technology sector evolves rapidly, so if you’re considering investing in it, a tech exchange-traded fund (ETF) could be a smart choice. A tech ETF allows you to easily gain exposure to the sector without the need to research individual companies, making it a convenient way to capitalize on potential growth. Additionally, an ETF offers diversification, helping to lower your risk compared to investing in just a few individual stocks.

Below are some top tech ETFs to consider for your portfolio, with data current as of Sept. 10, 2024.

What are the main kinds of tech ETFs?

The technology sector, categorized as “information technology” under the GICS classification system, is vast and divided into three major industry groups:

• Software and Services: This group includes companies that develop software and provide IT services.
• Technology Hardware and Equipment: This group covers three main areas—communications equipment, technology hardware (storage and peripherals), and electronic equipment, instruments, and components.
• Semiconductors and Semiconductor Equipment: This includes companies that produce semiconductors (chips) and the equipment used to manufacture them.

For broad exposure, some ETFs invest across the entire sector, offering a diversified mix of companies from each group.

Best tech ETFs

1. Best software & services ETF

iShares Expanded Tech-Software Sector ETF (IGV)
This ETF tracks an index of North American software and interactive media companies. Major holdings include Salesforce, Microsoft, and Adobe.

• 5-year returns (annualized): 15.1%
• Expense ratio: 0.41%
• Dividend yield: 0.00%

2. Best internet ETF

First Trust Dow Jones Internet ETF (FDN)
This ETF mirrors the performance of the Dow Jones Internet Composite Index, which includes U.S. internet giants like Amazon, Netflix, and Meta Platforms.

• 5-year returns (annualized): 7.2%
• Expense ratio: 0.51%
• Dividend yield: N/A

3. Best semiconductor ETF

iShares Semiconductor ETF (SOXX)
Tracking U.S.-listed semiconductor stocks, this ETF’s top holdings include NVIDIA, Broadcom, and Advanced Micro Devices.

• 5-year returns (annualized): 25.2%
• Expense ratio: 0.35%
• Dividend yield: 0.6%

4. Best diversified tech ETF

Vanguard Information Technology ETF (VGT)
Offering broad exposure to the IT sector, this ETF holds top stocks like Apple, Microsoft, and NVIDIA.

• 5-year returns (annualized): 21.5%
• Expense ratio: 0.10%
• Dividend yield: 0.6%

What to look for in an ETF

When investing in ETFs, it’s important to consider several factors to ensure you’re making an informed choice. Here are three key aspects to evaluate:

• Sub-sector Focus:
  Different tech sub-sectors, like software, hardware, or semiconductors, react uniquely to industry trends. For example, software companies may benefit from rising demand, while semiconductor firms face cyclical challenges. Understanding which sub-sector your ETF focuses on helps ensure you’re investing in the right space.
• Investment Track Record:
  While past performance doesn’t guarantee future results, an ETF’s track record can offer insight into its potential. Consider whether the fund has outperformed or lagged behind its sector. The performance may be driven by the sub-sector’s characteristics, as some tech areas consistently outshine others.
• Expense Ratio:
  The expense ratio reflects the annual cost of owning the ETF, expressed as a percentage of your investment. Lower expense ratios are better for long-term returns, and larger ETFs often offer lower costs because their operational expenses are spread across more assets.

How to invest in tech ETFs

ETFs offer a convenient way to invest in the tech sector, but you’ll still need to understand which industries you’re targeting. Some areas, like semiconductors, are more cyclical, with pronounced booms and busts, while others, such as software, might offer more consistent growth.

If you’re optimistic about a specific sub-sector, like semiconductors, you could choose a focused fund to potentially benefit from an industry upswing. Alternatively, you may prefer the higher margins of software companies, where incremental sales translate to significant pre-tax profits.

In Conclusion

Investing in tech ETFs provides diverse options, from funds that focus on specific sub-sectors to those that cover the entire tech industry. Knowing what each ETF covers and understanding the risks and returns involved is key. Some investors prefer broad index funds, like those based on the S&P 500, to avoid sector-specific volatility.