Choosing the best Tech ETF

2017 has been a hot year for Technology stocks, with FANG stocks (FB, AMZN, NFLX, GOOGL) on average up more than 30% YTD. Technology is a very special sector; one day most companies will infact be technology companies with all the advancements and innovations. This creates another issue with individual stocks in this sector. There will always be new ideas, and new technology companies can rapidly replace each other. That is why owning the sector as a whole might be a good idea. You might not catch the greatest return, but you will definitely diversify your risk among many companies. There are many technology ETFs out there, so it is important to carefully examine each one. In this article We will be going through 7 tech ETFs to see which one is the best choice.

XLK

The SPDR Technology Select Sector ETF is one of the most famous and liquid technology ETFs with more than $18 billion assets and average volume of around 7 million shares. XLK selects its stocks from technology and telecommunication companies of the S&P 500 weighted by market capitalization. It currently has 73 holdings, YTD return of 26% (compared to S&P 500's YTD return of 15%), 1 year return of 30% (S&P 22%), and a cumulative 5 year return of 131% (S&P 101%) as of October 2017. With this ETF you get exposure to all the large cap tech and telecom companies. This year telecoms have not performed very well (AT&T -11% and Verizon -2% YTD), so pure tech ETFs have outperformed XLK so far. Nonetheless, this is a solid technology ETF to hold during tech bull runs. XLK's expense ratio is 0.14%. 

RYT

Guggenheim S&P 500 Equal Weight Technology ETF covers almost the same companies as XLK, but it weighs them equally in order to have an edge in performance. This smart beta currently has 69 holdings, $1.48 billion in assets, around 75,000 average volume and expense ratio of 0.40%. So, has this methodology paid off? So far, it has a YTD return of 29% (XLK 26%) and many believe it will continue to outperform because it gives all the technology companies an equal chance to grow. As of October 2017, RYT has a 1 year return of 36% (XLK 30%), and an impressive 5 year cumulative return of 185% (XLK 131%). 

QQQ

Powershares' QQQ is an ETF based on NASDAQ-100 index with an expense ratio of 0.20%. If you have been in the ETF investing world, this ETF needs no introduction. With a whopping $52 billion in assets and an average daily volume of more than 30 million shares, it is the 8th largest ETF in the US market. QQQ is not a pure technology ETF, in fact, only 60% of the fund's assets are in technology; 20% is in consumer discretionary, 11.2% in healthcare, 4.7% in consumer staples, 2.25% in industrials and 0.93% in telecom. Because of its large tech allocation, this ETF performs best when tech rallies, and due to its other 40% allocation, it can still perform well even if tech sector slows down or goes through sell-off. The performance of this ETF has been solid; YTD return is 26% (XLK 26%), 1 year return is 26% (XLK 30%) and 5 year cumulative return is 141% (XLK 131%). 

VGT

Vanguard Information Technology ETF is a pure technology fund that tracks MSCI US Investable Market Information Technology 25/50. It has 361 stocks in its portfolio, $15 billion in assets and daily volume of about half a million shares. If you are looking for a tech ETF, VGT is as tech as an ETF can get. Vanguard is famous for its low costs (expense ratio of 0.10%), and if you have a brokerage account with Vanguard, there is no commission either, making it an ideal long-term investment ETF. The performance of VGT has been top-notch with YTD return of 30% (XLK 26%), 1 year return of 32% (XLK 30%) and 5 year cumulative return of 145% (XLK 131%).

IYW

iShares US Technology ETF tracks Dow Jones U.S. Technology Index, and provides Exposure to U.S. electronics, computer software and hardware, and informational technology companies. It has 142 holdings, $3.74 billion in assets, 50,000 daily volume, and expense ratio of 0.44%. Due to its exposure to smaller tech companies, it has been able to perform well in this sector with YTD return of 30% (XLK 26%), 1 year return of 31% (XLK 30%), and 5 year cumulative return of 133% (XLK 131%). 

TCHF

iShares Edge MSCI Multifactor Technology ETF is a smart beta with a small number of holdings (currently 43), that chooses them based on four factors; value, quality, size and price momentum. This is a new ETF (inception date May 10, 2016) that tries to outperform the market by tilting towards a smaller selection of tech companies that have strong fundamentals and momentum. So far, TCHF has performed reasonably well with YTD return of 31% (XLK 26%). The structure of this ETF is an interesting one and time will tell if this ETF can outperform the market or not.

IXN

iShares Global Tech ETF provides exposure to tech companies around the world by tracking S&P Global 1200 Information Technology Sector index. If you want to go global with your tech investment and have Samsung and Tencent along with your Apple and Google, then this ETF might be right for you. It has $1.5 billion in assets, 117 holdings, expense ratio of 0.48%, and a mere 7500 average daily volume (not that liquid for large amounts). Still, the majority of its underlying assets are in US (74%), with Japan (5.25%), South Korea (4.49%), and China (3.63%) being the other major locations. The performance has been very impressive this year, and its return YTD is 34% (XLK 26%). 1 year return is 35% (XLK 30%), and 5 year cumulative return is 137% (XLK 130%).


In conclusion, technology sector has been on a tear for the last few years, and it very well might go higher as demand for this sector increases around the world. Large cap tech companies are household names now and it is not going to change anytime soon. The ETFs in this article are all great options to take advantage of this tech bull run. However, never forget that limiting your investment to one sector increases your risk, and if tech stocks become overvalued again (as they did back in 1999), we might see a correction down the road.

Disclosure: At the time of this publication I have no position in any of the ETFs mentioned. This publication is NOT intended as financial advice. Published statements are opinions only.