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 once-loved 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 last year.
But as the old saying goes, past performance is not an indicator of future returns. And after the bloodbath, many investors have started to wonder if there are some beaten-down bargains in tech that could outperform in 2023.
“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.” — Daniel Milan, managing partner and investment advisor representative at Cornerstone Financial Services
Of course, when the giants start to topple, it can be hard to know where to place your bets. This is where exchange-traded funds, or ETFs
, come into play. With the capacity to hold dozens or even hundreds of tech stocks, ETFs can be a smart alternative to stock picking in uncertain times.
“ETFs can take on a variety of flavors — from broad market exposure like the S&P 500 to highly targeted funds that invest in robotics — allowing all types of investors to benefit from economies of scale and the efficiency of the fund structure,” says Kristy Akullian, senior iShares investment strategist at BlackRock.
But that diversification is not a pass at investing. You still need to do your research to find the best tech ETF for your portfolio, she says.
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If you’re thinking long term, or if you’re simply aggressive and want a swing-trade success for 2023, here are some leading tech ETFs to consider:
— First Trust NASDAQ Cybersecurity ETF (CIBR)
— Invesco QQQ Trust (QQQ)
— Vanguard Information Technology ETF (VGT)
— VanEck Semiconductor ETF (SMH)
— Invesco S&P 500 Equal Weight Technology ETF (RYT)
First Trust NASDAQ Cybersecurity ETF (CIBR)
“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. 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 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).
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.
[READ: 7 ETFs to Bet on a Banking Sector Rebound]
Invesco QQQ Trust (QQQ)
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 $161 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 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, half of its assets are in the tech sector versus 29% for the S&P 500.
Vanguard Information Technology ETF (VGT)
The largest truly sector-specific technology ETF is VGT, with some $45 billion in assets at present. Just as QQQ has its quirks by also including some stocks outside Big Tech mainstays, VGT goes the other way with a massive prioritization of larger tech stocks.
Thanks to its weighting system, where the bigger companies represent more of the portfolio, 60% of the fund’s total assets are in the top 10 positions alone — with Apple Inc. (AAPL) and Microsoft Corp. (MSFT) at 39% 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.
VanEck Semiconductor ETF (SMH)
After the meltdown of global supply chains and a crunch for chipmakers during the pandemic, semiconductor stocks have been an area of increasing interest for investors despite recent underperformance. As a result, this leading chipmaker-focused fund from VanEck has swelled to almost $8 billion in assets — that’s up from just over $6 billion in assets as of January — even as traders have abandoned other tech ETFs.
Top components of this fund include Nvidia, Taiwan Semiconductor Manufacturing Co. Ltd. (TSM) and Advanced Micro Devices Inc. (AMD). This one again is top heavy, however, with about 60% of its assets in the top 10 holdings. That said, if you’re looking to play this specific corner of the tech sector in 2023, SMH is the leading semiconductor ETF to do so.
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. To mitigate this, 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 might see some holdings get 1.78% of the assets while others are only 1.5%, but such minor differences are forgivable — especially when other funds put 20% of their assets into a single company.
The result of this equal-weight approach is a far more diversified portfolio with only 15% of its total assets in the top 10 holdings. This also means you get a fund that slants more toward mid-cap than large-cap, with more than 46% of its assets in medium-sized companies and only 38% in large companies. And the giants get less than 14%.
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.
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5 Best Tech ETFs to Buy for 2023 originally appeared on usnews.com
Update 03/23/23: This story was previously published at an earlier date and has been updated with new information.
