Examining the top tech ETFs for 2022.
The technology sector of the stock market outperformed over the last decade thanks to a low interest rate environment and Big Tech stocks like Apple Inc. (ticker: AAPL) and Facebook parent Meta Platforms Inc. (META). Stocks of companies involved in the manufacture and distribution of electronics, semiconductors, software, computers, smartphones, artificial intelligence, the cloud, cybersecurity and other innovative products and services pulled ahead strongly thanks to cheap capital and high consumer spending. However, this good fortune reversed dramatically in 2022. This year, a confluence of higher-than-expected inflation, aggressive Federal Reserve interest rate hikes, and supply chain issues caused the sector to significantly underperform. Still, many of the companies in the sector continue to post strong revenues and remain indispensable fixtures of modern society. Investors brave enough to “buy the dip” can do so in a safer manner via a tech sector exchange-traded fund, or ETF. Here is a list of the seven best technology ETFs to buy today.
Technology Select Sector SPDR Fund (XLK)
State Street offers 11 ETFs called “Select Sector” funds, each of which corresponds to a particular stock market sector represented in the S&P 500. In this case, XLK tracks the Technology Select Sector Index, which is comprised of 76 S&P 500 constituent stocks involved in the technology industry. In terms of holdings, XLK is dominated by two stocks: Apple, at 23.4%, and Microsoft Corp. (MSFT), at 22.9%. With an average weighted market capitalization of $1.1 trillion and price-to-earnings ratio of 21.4, the fund skews heavily toward large-cap, high-valuation growth stocks, which is to be expected given their representation in the S&P 500. XLK costs a 0.1% expense ratio, or around $10 annually for a $10,000 investment.
Vanguard Growth ETF (VUG)
Although not a pure technology fund per se, the high concentration of technology companies in VUG makes it great for a low-cost, passive sector tilt. VUG tracks the CRSP US Large Cap Growth Index, which holds 266 stocks. As noted, the fund is heavily skewed toward tech sector companies, which comprise 49% of the ETF. Top holdings include Apple, Microsoft, Alphabet Inc. (GOOG, GOOGL), Tesla Inc. (TSLA), Meta Platforms and Nvidia Corp. (NVDA). VUG is a great way for investors to gain access to these stocks as the top 10 holdings account for over 50% of the ETF by weight. VUG is also very popular and liquid, with over $148 billion in assets under management, or AUM. The ETF costs a 0.04% expense ratio.
Vanguard Mega Cap Growth ETF (MGK)
Is VUG not concentrated enough in Big Tech stocks for your needs? Investors seeking more exposure to large- and mega-cap U.S. tech stocks can opt for MGK, which passively tracks the performance of the CRSP US Mega Cap Growth Index. MGK holds just 108 domestic stocks, making it significantly less diversified and comprehensive than VUG. MGK has the same top 10 holdings as VUG, but assigns significantly more weight to them, at 61% of the total fund. Overall, 53% of MGK is comprised of technology sector companies, with Big Tech represented strongly in its top holdings. Compared to VUG, MGK is less popular among investors, with AUM of $11.5 billion, and slightly more expensive with a 0.07% expense ratio.
Vanguard Information Technology Index (VGT)
Passive investors looking for pure-play exposure to tech stocks can do so via VGT, which tracks the MSCI US Investable Market Information Technology 25/50 Index. Compared to VUG or MGK, VGT is comprised solely of tech sector companies as opposed to just general large-cap growth stocks. Compared to XLK, VGT holds more stocks, as it is not limited to tracking just the technology stocks contained in the S&P 500. Currently, VGT holds a total of 359 stocks, with top holdings consisting of Apple, Microsoft, Nvidia and Visa Inc. (V). Like many of the previous Vanguard ETFs, VGT is also very top-heavy, with its 10 largest holdings accounting for roughly 59% of the ETF by weight. Like XLK, VGT costs an expense ratio of 0.1%.
ARK Innovation ETF (ARKK)
Investors looking to track more speculative mid- and small-cap tech stocks can do so via ARKK, which is actively managed by famous fund manager Cathie Wood. ARKK focuses on up-and-coming companies involved in what Cathie calls “disruptive innovation.” As a thematic technology ETF, ARKK’s underlying holdings are involved in automation, genomics, electric vehicles, fintech, spaceflight, robotics, artificial intelligence and the “internet of things.” Currently, the largest holdings in ARKK are Tesla, Teladoc Health Inc. (TDOC), Zoom Video Communications Inc. (ZM) and Coinbase Global Inc. (COIN). Many of these stocks did extremely well during the pandemic but have since fallen hard. Despite this, ARKK continues to attract strong investor inflows, with Cathie bullish on her five-year price targets. ARKK costs a higher expense ratio of 0.75%.
Invesco QQQ ETF (QQQ)
The Nasdaq-100 is a market-cap-weighted index of the largest 100 nonfinancial stocks listed on the Nasdaq exchange. In recent years, the Nasdaq 100 has become largely dominated by tech sector companies, with 49% of the index made up of them, and 17.2% allocated toward the closely related communications sector. Although hit hard in the 2001 dot-com bubble and 2007-2009 financial crisis, the Nasdaq 100 staged a strong bull run to outperform the S&P 500 from 2009 to 2021, largely thanks to the outperformance of Big Tech stocks. The Nasdaq 100 is currently in a bear market, but investors still bullish on the long term can buy it via QQQ. QQQ is highly popular, with $163 billion in AUM, a good options chain, and very strong liquidity. The ETF costs an expense ratio of 0.2%.
Direxion Daily Technology Bull 3x Shares (TECL)
Technology stocks are volatile, with intraday swings of 2% to 3% not uncommon, especially with earnings season coming up. Traders looking to gain magnified exposure to tech stocks can use options or margin trading, but this approach is risky. Another way is via leveraged ETFs like TECL, which aims to provide three times the daily performance of the S&P Dow Jones Technology Select Sector Index. If the underlying index rises or falls 3% in a day, TECL will likely rise or fall around 9%. However, TECL only provides daily leveraged exposure. If held for longer periods, returns can vary wildly from the three-times target due to compounding and volatility decay. As such, TECL is best suited for advanced investors with a high risk tolerance trying to day- or swing-trade. The ETF is also costly with an expense ratio of 0.94%.
Seven best technology ETFs to buy for 2022:
— Technology Select Sector SPDR Fund (XLK)
— Vanguard Growth ETF (VUG)
— Vanguard Mega Cap Growth ETF (MGK)
— Vanguard Information Technology Index (VGT)
— ARK Innovation ETF (ARKK)
— Invesco QQQ ETF (QQQ)
— Direxion Daily Technology Bull 3x Shares (TECL)
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Update 07/11/22: This article was published at an earlier date and has been updated with new information.