Much of the stock market growth in 2020 and into 2021 has been driven by tech. Industry leaders like Apple, Microsoft, Amazon, Alphabet (Google), and Facebook benefited from the coronavirus crisis that meant people had to work and entertain themselves at home. Other tech companies such as Tesla were also in vogue, and stimulus checks plus time on their hands encouraged many people to pile into the markets generally.
Tech investments can be fickle: falling as far (and fast) as they rise, or shooting to the stars when the companies invent the next big thing. Choosing which tech company will take off is a hit-and-miss endeavor, but you can invest in the entire sector via an exchange-traded fund (ETF) that provides instant diversification across the sector.
In this guide, we present the top ten best tech ETFs to trade this year.
Where Can I Trade Tech ETFs?
You can invest in ETFs in two ways: via a brokerage account or a robo-advisor. Both options come at minimal cost, but the robo-advisor option means you'd have to surrender the investment decisions to an algorithm.
A brokerage account gives you the freedom to select the ETFs you want to invest in for yourself.
What Is a Tech ETF?
An exchange-traded fund is composed of a basket of stocks, and a tech ETF is composed of stocks that fall within the US technology sector. Some of these companies are involved in software and services, some in hardware and equipment, and some in semiconductor manufacturing.
By being diversified across several stocks, a tech ETF is safer than betting on the performance of any single stock, but it doesn’t provide complete protection if the entire sector takes a turn for the worse.
Invest in Tech ETFs In 3 Steps
Find a Broker and Open Your Account
You need a broker to provide the trading platform on which to place your trades. Some of the things to look for in a broker are regulation, account protection, security, and support tools. Open an account, often within minutes, by entering your information (name, email address, etc.) and supplying any required identity documentation.
Find the Best Tech ETF
You can use our top ten list as a guide to the best tech ETF to buy but be sure to do your own research. The broker will list the ETFs that are available for you to trade via its online platform and you can typically click each one to find more information. Alternatively, search the web for the name of the ETF and you’ll find more information on many financial websites.
Place Your Trade and Manage It
One of the good things about ETFs is that they can be bought and sold just like individual stocks. You can buy instantly at the current market price or you can place an order to buy (e.g., a limit order) outside of market hours, to be executed automatically when the markets are next open. Applying a stop order to your newly opened trade lets you cap your loss at a specified level if the market goes against you.
Best Tech ETFs to Buy Now
- Vanguard Information Technology Index Fund ETF Shares
- Technology Select Sector SPDR Fund
- First Trust Dow Jones Internet Index Fund
- iShares U.S. Technology ETF
- First Trust Cloud Computing ETF
- iShares Global Tech ETF
- VanEck Vectors Semiconductor ETF
- ARK Next Generation Internet ETF
- ARK Innovation ETF
- O'Shares Global Internet Giants ETF
1. Vanguard Information Technology Index Fund ETF Shares (VGT)
Vanguard Information Technology Index Fund ETF Shares is our top tech ETF. This fund is the largest in its category, with $46.46 billion in net assets under management at the time of writing. VGT tracks the MSCI US Investable Market Information Technology 25/50 Index, which is a benchmark for small-, mid-, and large-cap US companies in the IT sector. The price of this ETF has been in a sustained uptrend from March 2020 to May 2021.
2. Technology Select Sector SPDR Fund (XLK)
Technology Select Sector SPDR Fund is the second-best ETF selection on our list. The fund manages $34.53 billion of assets at the time of writing, with Apple accounting for 22.70%. This fund follows the Technology Select Sector of the S&P 500 Index and it been in a sustained uptrend from March 2020 to May 2021.
3. First Trust Dow Jones Internet Index Fund (FDN)
First Trust Dow Jones Internet Index Fund is not fully invested in tech companies. It is diversified in other sectors because of how it's structured to follow the Dow Jones Internet Composite Index. Total assets under management are $10.37 billion at the time of writing, with tech holdings comprising 48.5% and communications accounting for 33.1%. After a sustained uptrend since March 2020, the price of this ETF became more volatile in the first half of 2021.
4. iShares U.S. Technology ETF (IYW)
iShares U.S. Technology ETF enjoyed a good run, almost doubling in price between the March 2020 low point and May 2021. This fund tracks the Dow Jones U.S. Technology Index and allocates 97.5% of its $6.77 billion assets (at the time of writing) to equities in the tech and communications sector.
5. First Trust Cloud Computing ETF (SKYY)
First Trust Cloud Computing ETF also did well in 2020 but became volatile in 2021. The fund invests 90% of its $2.25 billion assets (at the time of writing) in companies involved in the burgeoning cloud computing industry. It tracks the ISE CTA Cloud Computing Index TM's price and yield, and its top holdings include Kingsoft Cloud Holdings Ltd ADR, Microsoft, and MongoDB Inc Class A.
Expert Tip on Investing in Tech ETFs“ Since tech stocks can be volatile, you might want to consider investing in a tech ETF alongside other (uncorrelated) investments to reduce your risk through diversification. ”- Ron Mendoza
Why Trade Tech ETFs?
Investing in tech ETFs provides diversified exposure to stocks that could likely generate above-average returns in a portfolio. As already indicated, tech companies have been the primary growth driver in 2020-2021. Buying a tech ETF could be your opportunity to participate in this trend before it’s too late, but be careful, because “the trend is your friend only until it ends”.
Frequently Asked Questions
The number one tech ETF on our list is the Vanguard Information Technology Index Fund ETF but the others could also be good buys. Bear and mind that things can change.
Tech ETFs have been good investments since March 2020 and they could continue to be so. But nothing lasts forever, so be sure to diversify your portfolio.
Apart from retail investors, the institutions that hold ETFs include wealth managers, banks, investment advisors, and hedge funds.
The two assets are the same in that both can be traded in the market. However, a key difference is that ETFs usually consist of stocks in an index, whereas stocks are individual shares of a company.
Yes, for the same reason as mutual funds: someone else has taken the trouble to do the decision-making and diversification for you.
It's estimated that the tech sector is worth $1.9 trillion, which is the third-largest sector in the US economy.