The largest sector by market capitalization in the S&P 500 index is technology.
These are companies involved in the design, manufacturing and sale of electronic products and services. Common examples include software, semiconductor, smartphone, computer, video gaming, cloud networking, social media and artificial intelligence companies.
As a sector, technology has a “boom or bust” reputation. Back in the late 1990s, tech stocks soared to record valuations before collapsing during the dot-com bubble, posting three straight years of losses from 2000 to 2002.
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During the low-interest-rate bull market of 2020-2021, tech stocks soared again, led by megacaps like Apple Inc. (ticker: AAPL) and Alphabet Inc. (GOOG, GOOGL). This good fortune reversed in 2022, as a combination of rising interest rates, soaring inflation and lingering supply chain issues hurt their revenues and earnings. Investors looking to bet on the tech sector’s next bull run can do so via these exchange-traded funds, or ETFs:
— Invesco QQQ ETF (QQQ)
— ProShares UltraPro (TQQQ)
— Technology Select Sector SPDR Fund (XLK)
— Direxion Daily Technology Bull 3X Shares (TECL)
— Vanguard Information Technology Index (VGT)
— Invesco S&P 500 Equal Weight Technology ETF (RYT)
— ARK Innovation ETF (ARKK)
Invesco QQQ ETF (QQQ)
QQQ isn’t a pure-play technology sector ETF, but in recent years the ETF has become a favorite for investors looking to overweight their domestic tech stock allocation.
The ETF tracks the Nasdaq-100 Index, a market-cap-weighted index of the largest 101 nonfinancial companies listed on the Nasdaq exchange. Currently, around 50% of the ETF is weighted toward technology sector stocks, many of which are megacap companies that dominate the ETF’s top holdings and thus influence its overall performance.
QQQ is popular for investors looking to trade the sector short term given its high daily volume and well-developed options chain. The ETF has attracted about $164 billion in assets under management and costs an expense ratio of 0.2%. That works out to around $20 for every $10,000 invested annually.
ProShares UltraPro (TQQQ)
Investors looking for greater exposure to the Nasdaq-100’s performance can use a leveraged ETF like TQQQ.
This ETF targets a daily return of three times the performance of the Nasdaq-100. If the Nasdaq-100 increases by 1% in a day, TQQQ can be expected to gain 3%, and vice versa if the index falls.
However, the leverage target is reset daily. Over longer holding periods like a month or year, the returns of TQQQ might not be exactly three times that of the Nasdaq-100 due to volatility drag and compounding. The ETF is also pricey, costing a high expense ratio of 0.95%.
Technology Select Sector SPDR Fund (XLK)
Fund manager State Street offers a suite of 11 ETFs, each of which tracks a particular sector represented in the S&P 500 index. For pure-play exposure to tech sector stocks, investors can buy XLK, which tracks the Technology Select Sector Index.
XLK holds a total of 76 S&P 500 tech stocks weighted by market capitalization, with Apple and Microsoft Corp. (MSFT) making up 46% of the ETF combined. As a result, this ETF is not particularly diversified, but that might be desirable for bullish investors seeking concentrated exposure to the current top U.S. tech sector stocks. XLK costs an expense ratio of 0.1%.
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Direxion Daily Technology Bull 3X Shares (TECL)
Investors looking for leverage exposure to tech stocks might not like TQQQ due to its weighting toward non-tech sectors like consumer staples and industrials. A great alternative here is TECL, which targets a daily return three times that of the S&P Dow Jones Technology Select Sector Index.
If the index rises or falls 1% in a day, TECL will likely return 3% or lose 3% in a day. Like TQQQ, holding for longer periods is inadvisable due to the volatility drag and unpredictable compounding of returns. For swing or day traders, TECL might be a good alternative to using margin or options. The ETF costs a high expense ratio of 0.94%.
Vanguard Information Technology Index (VGT)
Investors looking for more diversified technology sector exposure beyond large-cap stocks held solely in the S&P 500 or Nasdaq-100 can consider VGT. This ETF tracks the MSCI US Investable Market Information Technology 25/50 Index, which holds 359 U.S. tech sector stocks.
Represented in the top holdings are Apple and Microsoft, but also semiconductor giant Nvidia Corp. (NVDA) and payment processor Visa Inc. (V). Still, VGT is somewhat concentrated due to its market-capitalization-weighted approach. The top 10 stocks in the ETF account for around 60% of its holdings and thus influence the ETF’s overall performance greatly. VGT costs an expense ratio of 0.1%.
Invesco S&P 500 Equal Weight Technology ETF (RYT)
Top U.S. technology sector stocks tend to be leading large-cap companies. When they’re held in a market-cap-weighted index, these companies tend to dominate the top holdings.
A way around this is by buying equal-weighted ETFs like RYT. This fund holds the technology stocks in the S&P 500 index but allocates roughly the same weight to each one. Thus, a titan like International Business Machines Corp. (IBM) is allocated 1.4%, the same as Cadence Design Systems Inc. (CDNS).
Compared to most technology sector ETFs, RYT holds a sizable allocation to mid-cap stocks at around 44%. However, the equal-weight approach does result in greater fund turnover and thus a higher expense ratio of 0.4%.
ARK Innovation ETF (ARKK)
Small-cap technology stocks tend to be up-and-coming innovators in “disruptive” fields like automation, battery technology, AI, spaceflight, robotics, cryptocurrency and the “internet of things,” to name a few.
These companies tend to be highly speculative, with high cash burn rates and negative profits, as they must prioritize research and growth above all else with the goal of finding a breakthrough.
Risk-tolerant investors who want to invest in these stocks can buy ARKK, which is actively managed by Cathie Wood and her team. ARKK’s largest holdings include Tesla Inc. (TSLA), Teladoc Health Inc. (TDOC) and Coinbase Global Inc. (COIN). The ETF costs an expense ratio of 0.75%.
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Update 10/07/22: This story was previously published at an earlier date and has been updated with new information.
