5 Tech ETFs That Outperform the Nasdaq

Investors want high returns, and few opportunities come close to the performance of the components of the Nasdaq. The Nasdaq Composite Index has more than doubled over the past five years and has a 348.8% cumulative total return over the past decade as of late January. It has a five-year annualized daily total return of 16.5% and a one-year return of 29.4%.

Both of those returns are higher than the S&P 500, and it’s pretty clear why that’s the case. It’s the emphasis on one specific category: the tech sector.

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The S&P 500 allocates roughly 34% of its assets to tech, while more than half of the Nasdaq is tech stocks. The Nasdaq also downplays industries that tend to have lower risks and lower potential rewards, such as utilities, basic materials and energy. Each of those sectors makes up less than 1% of the Nasdaq.

Some investors look at the Nasdaq as the benchmark to beat. Lucky for this group of investors, they have a choice of a few tech ETFs that have outperformed the Nasdaq over several years:

Tech ETF Expense Ratio 30-Day SEC Yield 5-Year Return*
Vanguard Information Technology ETF (ticker: VGT) 0.10% 0.46% 20.4%
VanEck Semiconductor ETF (SMH) 0.35% 0.46% 29.7%
Roundhill Magnificent Seven ETF (MAGS) 0.29% 2.01% N/A**
iShares U.S. Technology ETF (IYW) 0.39% 0.16% 22.0%
Technology Select Sector SPDR Fund (XLK) 0.09% 0.63% 20.4%

*Source: Morningstar. Annualized daily total return as of Jan. 31. **No five-year return available. One-year return for MAGS is 64.6% as of Jan. 24.

Vanguard Information Technology ETF (VGT)

VGT is the first ETF on this list that has outperformed the Nasdaq over the past year and over the past five years. The tech ETF has a reasonable 0.10% expense ratio and a 30-day SEC yield of 0.46%.

Vanguard rates this fund as a 5 out of 5 on the risk-reward scale. That means the potential returns are much greater, but the fund can take a big hit if the market enters a broad correction. The Nasdaq is also more vulnerable to market corrections than less risky funds like dividend income ETFs.

VGT has 316 stocks and puts everything into tech. More than a quarter of the fund’s total assets are in the semiconductor industry, while the systems software industry makes up close to 20% of all assets.

Apple Inc. (AAPL), Nvidia Corp. (NVDA) and Microsoft Corp. (MSFT) are the top three stocks, but you had better like those stocks if you want to buy VGT shares. That’s because those three stocks make up roughly 45% of the fund’s total assets. Throw in Broadcom Inc. (AVGO) and Salesforce Inc. (CRM), and you have a tech ETF that puts more than 50% of its capital into its top five holdings.

Oracle Inc. (ORCL), Cisco Systems Inc. (CSCO) and Accenture PLC (ACN) also frequent the top 10. The top three stocks and Broadcom are the only holdings that individually make up more than 2% of the fund’s total assets. VGT has an annualized return of 21.1% over the past decade as of Jan. 31.

VanEck Semiconductor ETF (SMH)

It’s hard to find an ETF that has kept up with this fund, even if you expand your search to non-tech ETFs. The VanEck Semiconductor ETF focuses on companies involved in semiconductor production and equipment. The fund has an annualized return of 26.3% over the past decade. It also delivered a 31.6% return over the past year due to the booming demand for artificial intelligence chips.

Just like the highly successful VGT, the VanEck Semiconductor ETF is also a top-heavy fund. The fund only holds 25 stocks, with Nvidia making up 18.2% of total assets. Taiwan Semiconductor Manufacturing Co. Ltd. (TSM), Broadcom and ASML round out the top four holdings, which make up about 45% of the fund’s total assets.

SMH has a 0.35% expense ratio and $23 billion in total net assets. It also has a 0.46% 30-day SEC yield. All of its funds are in the information technology sector, with about 75% of funds invested in U.S. companies.

Roundhill Magnificent Seven ETF (MAGS)

If you’ve followed the stock market for a few years, chances are that you’ve heard of the Magnificent Seven stocks. These seven tech giants, including Apple, Nvidia, Microsoft, Alphabet Inc. (GOOG, GOOGL), Amazon.com Inc. (AMZN), Meta Platforms Inc. (META) and Tesla Inc. (TSLA), have heavily influenced the Nasdaq and S&P 500.

It’s been for the best, since both of those benchmarks have performed well over the past decade. However, Roundhill Investments decided to separate the Magnificent Seven stocks from other investments in its MAGS ETF. This fund offers equal-weight exposure to the Magnificent Seven stocks, and it’s the first ETF to exclusively track those seven stocks.

MAGS rebalances its portfolio each quarter to ensure equal weights. It comes with a 0.29% expense ratio and has $1.8 billion in assets under management. The fund was launched on April 11, 2023, so there are no long-term annualized returns on this fund quite yet. However, with a 72.2% return over the past year, it has soundly outperformed the Nasdaq. It even has a 2.01% 30-day SEC yield.

The fund doesn’t hold any shares of Broadcom, which recently made it into the new “BATMMAAN” stocks moniker. It would be interesting to see if a BATMMAAN ETF can outperform a MAGS ETF in the future. For now, MAGS has done a fine job of outperforming other tech ETFs by offering investors exposure to the best of the best.

iShares U.S. Technology ETF (IYW)

The iShares U.S. Technology ETF offers exposure to domestic tech stocks, with almost all of its assets going into software, semiconductors and tech hardware. Apple, Nvidia and Microsoft are the top three holdings, and they make up more than 45% of total assets. Broadcom and Meta Platforms round out the top five, which represent more than 50% of the fund’s positions.

The fund didn’t perform too well during the pandemic, but it’s been a solid performer in recent years. It has an annualized 15.3% return over the past three years, including a 26.7% rally over the past year. IYW has a 0.39% expense ratio and a 0.16% 30-day SEC yield. The fund has $20 billion in net assets spread across 141 stock holdings.

IYW has a lengthy history. The fund was launched on May 15, 2000, just in time for the dot-com crash. However, the ETF recovered and generated solid long-term returns for investors who continued to hold their shares. It’s also worth noting that IYW has a 1.24% equity beta, which means it’s more volatile than the overall market.

Technology Select Sector SPDR Fund (XLK)

The Technology Select Sector SPDR Fund gives investors exposure to the S&P 500’s tech holdings. The top-heavy fund puts more than 40% of its total assets into Apple, Nvidia and Microsoft. Broadcom, Salesforce, Oracle and Cisco round out the top seven holdings.

XLK has $73 billion in assets under management spread across 69 holdings. It has a 0.65% 30-day SEC yield and a 0.09% expense ratio. XLK has an annualized 20.7% return over the past decade, including a 17.6% return over the past year.

While XLK holds all kinds of tech stocks, it plays favorites. More than two-thirds of all tech stocks are in the semiconductor and software industries. Technology hardware makes up 17% of the fund’s total assets, with the remaining three sectors (IT services, communications equipment, and electronic equipment instruments and components) making up roughly 14% of the fund’s total assets.

XLK is one of the oldest tech ETFs available. It was launched in late 1998, and has withstood many economic cycles while remaining one of the top choices for tech investors.

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5 Tech ETFs That Outperform the Nasdaq originally appeared on usnews.com

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