The 5 Top Technology ETFs

Markets Motley Fool

The technology sector has always been a haven for high-growth companies, leading the way forward with innovative ideas that, in some cases, change the world. If you want to invest in a variety of tech stocks through a single investment, exchange-traded funds that specialize in technology can be a great way to go. The following five ETFs are among the most popular for technology investors, and they can help you spice up your portfolio with higher-growth prospects.

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Technology ETF

Assets Under Management

Expense Ratio

5-Year Average Annual Return

Technology Select Sector SPDR (NYSEMKT: XLK)

$16.2 billion

0.14%

17.3%

Vanguard Information Technology (NYSEMKT: VGT)

$13.1 billion

0.10%

17%

First Trust Dow Jones Internet (NYSEMKT: FDN)

$4.4 billion

0.54%

18.9%

iShares U.S. Technology (NYSEMKT: IYW)

$3.4 billion

0.44%

17%

First Trust Nasdaq-100 Technology Sector (NYSEMKT: QTEC)

$2 billion

0.60%

23.1%

Looking for the full spectrum of technology

Different technology stocks have differing scope across the sector. Some funds include every bit of the industry, including hardware, software, telecommunications, technology manufacturing equipment, and information technology services. The tech ETFs with the broadest scope include some stocks that you wouldn't necessarily first think of as being tech stocks, but they often share the same growth characteristics as traditional tech names.

Three of the ETFs on the list have a big-picture approach to tech. The Technology Select SPDR is the largest, and it has the vast majority of its money spread across software, internet, hardware, services, and semiconductors. Telecom makes up a small but still significant portion of the ETF's assets, and overall, you'll see nearly 75 stocks that give good coverage of the sector as a whole.

The Vanguard Technology ETF has slightly lower costs, and its approach doesn't entirely mirror that of the SPDR Tech ETF. Internet companies are the industry with the greatest weight in the Vanguard ETF, followed by hardware, systems software, and semiconductors. The holdings are more extensive, with 365 stocks in its portfolio as of its most recent report.

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The iShares Technology ETF has a higher expense ratio than the Vanguard and SPDR ETFs, but its holdings look eerily similar. The fund's software and services industry, which includes both traditional and internet-related offerings, make up more than half of the assets of the fund. Hardware is another quarter, with semiconductors representing all but a tiny fraction of remaining assets. One notable difference is that telecom is almost unrepresented in the iShares ETF's portfolio.

Losing weight

One issue with all three of the ETFs discussed above is that their holdings are weighted by market capitalization. That leads to the top stocks in the ETFs having huge weightings compared to the remainder of the stocks in the portfolio, so fund performance relies heavily on those key players.

The First Trust Nasdaq 100 Technology ETF uses a different approach. It looks at the tech stocks in the Nasdaq 100 index and then invests on an equal-weight basis, rebalancing quarterly. Therefore, all 34 holdings have weights of about 3%. That works out well when the top stocks in the industry are doing poorly, but it can lead to lagging performance when tech giants do well. You can see from relative returns that those smaller stocks have done a good job over the past five years, and that has bolstered the First Trust ETF's performance.

Drilling down on the internet

Another First Trust fund focuses only on internet stocks, defined as getting half of annual revenue from the internet. First Trust Dow Jones Internet has 42 holdings, and although it takes market capitalization into account in weighting those stocks, it also looks at average share volume and accounts for float-adjusted factors. That's especially important with internet stocks, many of which release only a small portion of their outstanding shares in initial public offerings.

Internet related stocks include a vast array of companies, ranging from internet retailers and online brokerage companies to cloud-computing specialists and social media sites. The growth of those subindustries has led to outperformance for the ETF, and investors hope that favorable trend will continue.

Find your ideal tech ETF

These top technology ETFs offer investors several options to get their tech exposure. You should be able to find a fund that will match up well with where you think the future of the technology sector will be.

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