When it comes to technology index funds, the granddaddy of them all is the Invesco QQQ Trust (ticker: QQQ), the avatar for the closely watched Nasdaq-100 — an index that isn’t a pure play, but which defines many investors’ perceptions of tech. Beating QQQ is a worthy target, with a five-year price gain of 102.3% as of Aug. 30, nearly doubling the 55.6% posted by the S&P 500.
But the mighty QQQ can be beaten. At least right now, and especially by specialty funds following semiconductor indexes.
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Technology funds are not for meek investors, or those who might need to convert their funds to cash at a short notice. They move up, as they are doing this year, and they can move down sharply, as they did in 2022. Many of the seven funds below track indexes that follow specific parts of the tech sector, and at given times one industry can be hot while another’s cool. This year, the hot industry is semiconductors, driven by the rush to develop technologies like artificial intelligence, cloud computing and the metaverse. At other times, software might be hotter.
Of 93 technology funds listed in VettaFi’s ETF database, there are more than enough candidates beating the vaunted QQQ’s five-year return to fill a short list. Several of them appear below. QQQ deserves a mention too, as a fund that covers the sector broadly and provides set-it-and-forget-it exposure to technology, says Aniket Ullal, head of ETF data and analytics at CFRA Research.
“QQQ is an interesting option for investors interested in a broader definition of what constitutes a technology ETF,” Ullal says.
The list below is predominantly driven by the best five-year returns, since that’s a period that will let most investors ride out market cycles to come. Tech fashions may change, and this year’s white-hot semiconductor funds may give way to general tech funds or software funds, so the best of those are worth noting. And there’s a place for QQQ, which concentrates on tech stocks but also blends in some of the rest of the U.S. economy.
Here are seven of the best tech index funds to buy now:
| Tech index fund | Expense ratio | Five-year total return |
| Van Eck Semiconductor ETF (SMH) | 0.35% | 203.9% |
| Vanguard Information Technology ETF (VGT) | 0.10% | 130.6% |
| SPDR S&P Semiconductor ETF (XSD) | 0.35% | 177.6% |
| iShares U.S. Technology ETF (IYW) | 0.39% | 133.8% |
| Fidelity MSCI Information Technology Index ETF (FTEC) | 0.084% | 127.1% |
| iShares Expanded Tech-Software Sector ETF (IGV) | 0.41% | 79.2% |
| Invesco QQQ Trust (QQQ) | 0.20% | 109.1% |
Van Eck Semiconductor ETF (SMH)
Up 53% this year through Aug. 30, this $10 billion fund has posted a five-year total return (which includes the impact of dividends, splits and spinoffs) of 203.9%. Tracking the MVIS US Listed Semiconductor 25 Index, this capitalization-weighted fund’s top holdings include Nvidia Corp. (NVDA) at more than 20% of the fund, Taiwan Semiconductor Manufacturing (TSM) at more than 10% and Broadcom Inc. (AVGO) at just over 5%. The fund’s annual management fee is a moderate 0.35% of invested assets. Don’t look for software or internet companies here: It’s a pure-play chip fund.
Vanguard Information Technology ETF (VGT)
Another star fund, this $54 billion tech fund is up 130.6% over the last five years, including roughly 40% in 2023. With many investors scrambling to figure out AI, this fund’s top holding is Apple Inc. (AAPL), maker of several of the world’s most ubiquitous consumer tech devices. Microsoft Corp. (MSFT) is next, standing in for the cloud computing boom, and Nvidia and Broadcom are also top holdings. Though the fund invests across tech’s subsectors, tracking the MSCI US Investable Market Information Technology 25/50 Index, it’s very concentrated in big names: More than 42% of the capitalization-weighted fund is invested in the top two holdings.
With an expense ratio of 0.1% of assets held, the fund is a relative bargain. Like some other tech funds, it doesn’t own Amazon.com Inc. (AMZN), Facebook parent Meta Platforms Inc. (META) or Google parent Alphabet Inc. (GOOG, GOOGL), which are technically now considered consumer discretionary or communications services companies.
SPDR S&P Semiconductor ETF (XSD)
This $1.5 billion fund from State Street Global Advisors aims to deliver chip companies of all sizes, by holding the members of S&P Total Market Index semiconductor subindex. With an expense ratio of 0.35%, the fund’s 44 holdings are nearly equally weighted. State Street describes XSD as a modified equal-weighted fund, so the $1.2 trillion Nvidia and $3 billion SiTime Corp. (SITM) are each about 3% of the fund.
It works pretty well, one could say: Five-year returns are 177.6%, and the fund is up about 26% this year despite a dip in August.
“Semiconductor ETFs like XSD have benefited from two macro developments: the passing of the CHIPS Act in 2022, which provided funding for semiconductor R&D and manufacturing in the U.S., as well as the rapidly growing interest in artificial intelligence,” Ullal says.
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iShares U.S. Technology ETF (IYW)
BlackRock’s $11 billion fund indexed to the Russell 1000 Technology RIC 22.5/45 Capped Index (USD) is up 49% this year, continuing a run that has produced a five-year return of almost 133.8% despite the 2022 dip. Because it’s tied to a broad capitalization-weighted index, more than a third of its portfolio is in Apple and Microsoft alone, with two-thirds in top 10 holdings that include Tesla Inc. (TSLA), Oracle Corp. (ORCL) and Nvidia.
An expense ratio of 0.39% is relatively modest, but the concentration makes this fund more risky than some other funds.
Fidelity MSCI Information Technology Index ETF (FTEC)
This fund is a broad-based play with some distinctively low fees, at just 0.084% of assets. It is a capitalization-weighted fund, which means it is heavy on big names — Apple and Microsoft are 43% of the portfolio, and its top 10 names eat up about 61%. It’s up 109% over five years.
The $7.5 billion fund owns more than 300 stocks, making it as well-diversified as the index it tracks. It hasn’t kept up with the semiconductor funds in 2023, but it’s not designed to.
“Unlike the Technology Select Sector SPDR (XLK) which is limited to the IT sector within the large-cap S&P 500, FTEC also holds mid- and small-cap stocks,” Ullal says. “It may be appropriate for those investors who believe that market breadth will improve, after a first half in 2023 where the largest mega-cap stocks accounted for the majority of market returns.”
iShares Expanded Tech-Software Sector ETF (IGV)
This $6.6 billion BlackRock fund, focused on specialty software, has performed well over the last five years, logging a 79% gain. While it won’t be exposed to any possible correction in chip stocks, VettaFi warns that this capitalization-weighted fund indexed to the S&P North American Technology-Software Index may not be diversified enough. It’s all U.S.-based companies, its stakes are all in companies that are adapting to the industry’s shift to cloud computing, and — maybe worst of all — a retail investor might own its main stocks as part of index funds already. The expense ratio is 0.41%.
“Many investors may be better off by looking at a more diversified tech ETF that offers exposure to multiple sectors instead of the software industry which is facing headwinds thanks to cloud computing and rampant piracy,” VettaFi says.
Invesco QQQ Trust (QQQ)
To casual observers, the $203 billion QQQ is the benchmark tech fund, thanks in part to its more than $100 million in annual marketing campaigns, and partly because the index it tracks, while not a technology index per se, is often referred to as the “tech-rich Nasdaq-100.”
While not as pure a technology play as VGT, let alone the chip funds, the QQQ owns a broader range of companies whose businesses are made possible by tech innovation, even if federal regulators’ industry classifications now say Amazon, Meta Platforms or Alphabet aren’t tech companies. It stands as a symbol for how technology weaves its way quickly into lives, so quickly that all of a sudden Amazon, which gets most of its profits from selling cloud computing services to businesses, is classified as a consumer company rather than a technology firm.
QQQ’s portfolio is the capitalization-weighted Nasdaq-100, and 61% of the fund’s holdings are formally classified as technology. That doesn’t count Tesla, Amazon, companies like Comcast Corp. (CMCSA) that sell internet access, or EBay Inc. (EBAY) and Netflix Inc. (NFLX), all of which are tech-heavy. Nearly 20% of the portfolio represents such technology-based companies no longer classified as tech businesses. The rest is made up of familiar names like Costco Wholesale Corp. (COST), PepsiCo Inc. (PEP) and Starbucks Corp. (SBUX), plus more than half a dozen drug and biotechnology stocks.
Even after 2022’s tech-led bloodbath, QQQ has more than doubled investors’ money over the last five years. Its expense ratio is 0.2% of assets, 40% of which it spends on marketing, according to the fund prospectus. Some funds do better, and many are more purely focused on tech, but there are reasons why QQQ is the biggest “tech” ETF out there.
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7 Best Tech Index Funds to Buy Now originally appeared on usnews.com
Update 08/31/23: This story was previously published at an earlier date and has been updated with new information.
