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The technology sector is known for its fast-paced nature, making it an attractive option for investors looking to capitalize on its potential growth. Investing in a tech exchange-traded fund (ETF) can be a convenient way to gain exposure to this sector without the need to analyze individual companies. Additionally, an ETF provides diversification, which can help reduce risk compared to investing in single stocks.
Here are some of the top tech ETFs to consider for your investment portfolio, with data accurate as of Sept. 10, 2024.
Understanding the Different Types of Tech ETFs
The tech sector is vast and is classified as “information technology” under the GICS classification system. This sector is further divided into three main industry groups:
- Software and services – This group includes software companies and IT services providers.
- Technology hardware and equipment – Encompassing communications equipment, technology hardware, storage and peripherals, as well as electronic equipment, instruments, and components.
- Semiconductors and semiconductor equipment – This category includes companies involved in semiconductor manufacturing and related equipment production.
For broad exposure to the tech sector, there are ETFs that invest across the entire industry, offering a diversified portfolio of tech companies.
Top Technology ETFs to Consider
1. Best software & services ETF
iShares Expanded Tech-Software Sector ETF (IGV)
This ETF tracks an index of North American software and interactive media companies, with top holdings including Salesforce, Microsoft, and Adobe.
- 5-year returns (annualized): 15.1%
- Expense ratio: 0.41%
- Dividend yield: 0.00%
2. Best internet ETF
First Trust Dow Jones Internet ETF (FDN)
This ETF aims to mirror the performance of the Dow Jones Internet Composite Index, which tracks U.S. internet companies. Key holdings include Amazon, Netflix, and Meta Platforms.
- 5-year returns (annualized): 7.2%
- Expense ratio: 0.51%
- Dividend yield: n/a
3. Best semiconductor ETF
iShares Semiconductor ETF (SOXX)
This ETF follows an index of U.S.-listed semiconductor stocks, with top holdings such as NVIDIA, Broadcom, and Advanced Micro Devices.
- 5-year returns (annualized): 25.2%
- Expense ratio: 0.35%
- Dividend yield: 0.6%
4. Best diversified tech ETF
Vanguard Information Technology ETF (VGT)
This ETF tracks an index of the information technology sector, providing investors with diversified exposure to the tech industry. Top holdings include Apple, Microsoft, and NVIDIA.
- 5-year returns (annualized): 21.5%
- Expense ratio: 0.10%
- Dividend yield: 0.6%
Key Considerations When Choosing an ETF
When selecting an ETF, it’s important to evaluate certain aspects to ensure it aligns with your investment goals. Here are three critical factors to consider:
- The sub-sector – Different sub-sectors within the tech industry may respond differently to market conditions. Understanding the specific companies held by the ETF can provide insight into potential performance.
- The investment track record – Reviewing the historical performance of the ETF can offer indications of future returns, although past performance is not indicative of future results.
- The expense ratio – Pay attention to the expense ratio, as it impacts the overall cost of owning the fund and can vary among different ETFs.
Additionally, larger ETFs typically have lower expense ratios due to economies of scale. Therefore, choosing a fund with a competitive expense ratio is essential for maximizing returns.
Investing in Tech ETFs
While investing in a tech ETF provides exposure to the sector, it’s essential to understand the various sub-sectors and their unique dynamics. Some sectors may exhibit consistent growth, while others are more cyclical and subject to market fluctuations.
By carefully selecting ETFs that align with your investment objectives, such as focusing on specific industries like semiconductors or software companies, you can capitalize on sector-specific opportunities and potentially enhance your returns.
Ultimately, investors have different options for gaining exposure to the tech sector, each with its own risk-return profile. Whether opting for diversified tech ETFs or sector-specific funds, understanding the nuances of each ETF can help make informed investment decisions.
— Updated by Brian Baker for Bankrate
Editorial Disclaimer: It is recommended that all investors conduct thorough research into investment strategies before making decisions. Past performance of investment products does not guarantee future price appreciation.