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. The index isn’t a pure play, but it defines many investors’ perceptions of tech. Beating QQQ is a worthy target, with a five-year price gain of 162.6% as of Sept. 25. That’s significantly more than the 93.6% posted by the S&P 500 over the same five years.
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But the mighty QQQ can be beaten — at least right now, and especially by specialty funds following semiconductor indexes.
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 have for the most part this year, and they can move down sharply, as they did in 2022.
Many funds track indexes that follow specific parts of the tech sector, and at given times, one industry can be hot while another’s cool. Lately, the hot industry is semiconductors, driven by the rush to develop technologies such as artificial intelligence, cloud computing and the metaverse. At other times, software might be hotter.
Of 129 technology index 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.
The list 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 eight of the best tech index funds to buy now:
| Tech Index Fund | Expense Ratio | Five-Year Annualized Return |
| VanEck Semiconductor ETF (SMH) | 0.35% | 39.2% |
| iShares U.S. Technology ETF (IYW) | 0.39% | 22.6% |
| Fidelity MSCI Information Technology Index ETF (FTEC) | 0.084% | 20.8% |
| Vanguard Information Technology ETF (VGT) | 0.1% | 20.8% |
| iShares Global Tech ETF (IXN) | 0.41% | 20.5% |
| SPDR NYSE Technology ETF (XNTK) | 0.35% | 19.5% |
| Invesco QQQ Trust (QQQ) | 0.2% | 19% |
| Technology Select Sector SPDR Fund (XLK) | 0.09% | 16.8% |
Van Eck Semiconductor ETF (SMH)
Up nearly 40% this year through Sept. 24 alone, this $23.7 billion fund has posted a five-year annualized return of nearly 40% as well. 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 Co. Ltd. (TSM) at more than 14% and Broadcom Inc. (AVGO) at nearly 9%. The fund’s annual management fee is a moderate 0.35% of invested assets. Continuing down the list of holdings shows that nearly three-quarters of the fund’s assets are in its top 10 names. But that should come as no surprise given it’s a specialized approach to tech. Don’t look for software or internet companies here: It’s a pure-play chip fund.
iShares U.S. Technology ETF (IYW)
BlackRock’s $18.6 billion fund indexed to the Russell 1000 Technology RIC 22.5/45 Capped Index is up just over 25% this year, continuing a run that has produced a five-year annualized return over 22% despite the 2022 dip. Because it’s tied to a broad capitalization-weighted index, almost one-third of its portfolio is in Apple Inc. (AAPL) and Microsoft Corp. (MSFT) alone, with nearly two-thirds in top 10 holdings that include Nvidia, Meta Platforms Inc. (META) and Broadcom.
An expense ratio of 0.39% is relatively modest, but the concentration makes this fund another riskier play than some other index funds.
Fidelity MSCI Information Technology Index ETF (FTEC)
FTEC 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’s heavy on big names — Apple and Microsoft are about 30% of the portfolio, and its top 10 names eat up 58%. But these names have pulled their weight, helping the portfolio gain nearly 21% annualized over five years.
The $11.8 billion fund owns nearly 300 stocks, making it one of the more diverse tech funds on this list. It hasn’t kept up with the semiconductor funds in 2023, but it’s not designed to.
Unlike the XLK, which is limited to only large-cap names that make the S&P 500’s list, FTEC can and does venture into smaller-sized companies. More than one-fifth of the portfolio is in medium-, small- and micro-cap stocks. That said, the big boys still dominate at 54% of the fund’s assets. But since smaller companies tend to have greater growth potential, this fund could be a good pick if you’re looking for long-term growth and bullish on tech’s future.
Vanguard Information Technology ETF (VGT)
Another star fund, this $76.2 billion tech fund is second in size only to QQQ. But VGT comes out ahead in terms of five-year performance, as the fund is up an average of 20.8% each year over that timeframe, including almost 53% in 2023. With many investors scrambling to figure out AI, this fund’s top holding is Apple, maker of several of the world’s most ubiquitous consumer tech devices. Nvidia is next, followed by Microsoft. 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 44% of the capitalization-weighted fund is invested in the top three 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 considered consumer discretionary or communications services companies.
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iShares Global Tech ETF (IXN)
So far the funds listed have focused on U.S.-based tech companies, but IXN knows there are other countries on the forefront of tech than just the good ol’ U.S. of A. As a global tech fund, it isn’t afraid to cross oceans to find the best prospects. Its holdings include companies based in Europe and Asia, as well as North America — though North America still makes up the bulk of the portfolio at over 80% of assets.
Thanks to this global perspective, you’ll find companies like Taiwan-based Taiwan Semiconductor Manufacturing, Netherlands-based ASML Holdings NV (ASML) and South Korea-based Samsung Electronics Ltd. However, these companies fall below Microsoft, Nvidia and Apple, which account for over 44% of the portfolio. You’re also looking at 63% of total assets in the top 10 names, so while this fund offers better geographic diversification than others, it’s not without concentration risk.
SPDR NYSE Technology ETF (XNTK)
In some ways, XNTK is the corollary to QQQ. While QQQ focuses on the Nasdaq, a naturally tech-heavy exchange, XNTK turns its focus to the technology segment of the New York Stock Exchange (NYSE). It does so by tracking the NYSE Technology Index, which is composed of 35 leading U.S. technology-related companies. What makes the index and, by extension, XNTK truly unique, though, is its equal-weighting system. Unlike market-cap weighting, which allocates fund assets in proportion to company size, equal weighting allocates evenly across all holdings, regardless of size. This means each of its 35 holdings gets roughly the same weight in the portfolio. As a result, only 37% of the fund’s assets are in its top 10 names — nearly half of what most other funds on this list post.
The portfolio deviates somewhat, too, as you’ll find names like Netflix Inc. (NFLX), South American MercadoLibre Inc. (MELI) and Applied Materials (AMAT) alongside Nvidia, Broadcom and Meta in the top 10 list.
Invesco QQQ Trust (QQQ)
To casual observers, the $289.7 billion QQQ is the benchmark tech fund, thanks in part to its more than $200 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 others on this list, 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 and 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 has a cloud computing services segment, is classified as a consumer company rather than a technology firm.
QQQ’s portfolio tracks the capitalization-weighted Nasdaq-100 index, and over 50% of the fund’s holdings are formally classified as technology. That doesn’t count tech-heavy Tesla and Amazon, or companies like Comcast Corp. (CMCSA) that sells internet access. 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.
Technology Select Sector SPDR Fund (XLK)
With a 0.09% expense ratio, XLK finally gets into the fee level most would expect from an index fund. It falls far below the average cost for technology stock exchange-traded funds on VettaFi, which is 0.58%. So not only are you getting a great deal, but you’re also getting a great performer, too. XLK is up approximately 16% year to date and nearly 17% each year over the past five years.
XLK aims to mirror the technology sector of the S&P 500. This leads to a portfolio of 67 companies, many of which you’ll likely recognize. Top holdings include Microsoft, Nvidia and Apple. As with most tech funds, you’re facing some concentration risk here. Microsoft alone accounts for more than one-fifth of the portfolio, and the top 10 holdings combined are two-thirds of it. But when tech thrives, this fund does, too.
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8 Best Tech Index Funds to Buy Now originally appeared on usnews.com
Update 09/25/24: This story was previously published at an earlier date and has been updated with new information.
