Much of the stock market growth lately has mainly been tech-driven. Most industry leaders like Apple, Microsoft, Amazon, Alphabet, Facebook, Tesla, and Nvidia found a way to put on an additional $3.4 trillion in combined market cap despite the pandemic.
But as an investor, it's never easy to select which among these tech companies will bear fruit, much less find the next big thing. So, if you can invest in them all, why would you bet on a single stock?
That's what ETFs are for -- it provides you instant diversification. In other words, you no longer have to put funds in one stock, but you can have it scattered among the companies you like. And in this article, we listed the top ten best tech ETFs to trade in 2021.
What Is a Tech ETF?
A tech ETF is an exchange-traded fund composed of a basket of stocks within the U.S. technology sector. And it involves companies in a variety of industry groups and sub industries, some of which include those in software and services, hardware and equipment, and semiconductor manufacturing.
The tech sector, of course, is among the most volatile markets to trade, so investments in technology companies may present a higher risk-reward profile.
Therefore, in adding tech ETFs to your portfolio, it's crucial to understand that while certain funds can outperform the broader market, the probability of loss runs at an identical rate.
Invest In Tech ETFs In 3 Steps
Find a Broker and Open Your Account
To get started in adding tech ETFs to your portfolio, you need a broker to provide you the trading platform to place your orders. And some of the things you should look for in a broker include regulation, account protection (e.g., insurance, guarantees), account security, and support tools. Once you find a broker who fits all the criteria, the next step is to accomplish all the requirements to open your trading account.
Find the Best Tech ETF
The next step is to determine the fund you'll purchase. And you can use our top ten list as a guide to get an idea about which tech ETF will likely meet your investment objectives. But in this stage, it's also important to take your time in formulating your own assessment before pulling the trigger. If you go down the road of DIY investing, it's always helpful to think independently as it prevents you from buying into the noise, which could set you up for failure.
Place Your Trade and Manage It
Once you've analyzed which one is best, the last step is to buy the ETF and then actively manage your position. Here, you need to establish rules for exiting your trades, and this could either be a preset profit target or a "stop-loss" criteria.
Where Can I Trade Tech ETFs?
You can invest in ETFs in two ways. One is with a brokerage account, and the other is through a "robo-advisor," and the good news is that both options offer minimal costs.
However, if you choose a robo-advisor, you'd have to surrender the investment decision making to algorithm-driven platforms.
On the other hand, if you choose a brokerage account, there is the freedom to select the funds you want to invest in.
Thus, it all boils down to preference and how you approach investing. One possible downside when using a robo-advisor, though, is you subject your funds to services with little human intervention. This means that everything relies on automated strategies.
It's always best to have an active role in your investments because not only do you have the liberty to make your own decisions, but you also learn and gain experience from the process.
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
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. VGT tracks the MSCI US Investable Market Information Technology 25/50 Index, which is a benchmark for small-, mid-, and large-cap U.S. companies in the IT sector.
And in terms of performance, the fund sailed through 2020 with gains totaling 38%. VGT currently trades at $378.
Technology Select Sector SPDR Fund (XLK)
Technology Select Sector SPDR Fund is the top-two choice on this list. The fund manages $34.53 billion assets, with Apple making up 22.70% of them. It follows the Technology Select Sector of the S&P 500 Index and has a current year to date yield of 4.74%. The fund has a current NAV of $137.
First Trust Dow Jones Internet Index Fund (FDN)
First Trust Dow Jones Internet Index Fund is not fully invested in tech companies but is diversified in other sectors because of how it's structured to follow the Dow Jones Internet Composite Index. Its total assets under management are $10.37 billion, with tech holdings comprising 48.5% and communications 33.1%. And the fund presently trades at $241.95 as of writing.
iShares U.S. Technology ETF (IYW)
iShares U.S. Technology ETF has a solid four-month rally so far, which took its price to nearly a 26% jump from November. It's currently trading at $92.83.
The fund tracks the Dow Jones U.S. Technology Index and allocates 97.5% of its $6.77 billion assets to equities in the tech and communications sector.
First Trust Cloud Computing ETF (SKYY)
First Trust Cloud Computing ETF also has an ongoing stellar four-month rally, appreciating 44% since November, and trades at $110.36 at present. The fund invests 90% of its $2.25 billion assets to companies involved in the cloud computing industry; it tracks the ISE CTA Cloud Computing Index TM's price and yield. Its top holdings include Kingsoft Cloud Holdings Ltd ADR, Microsoft and MongoDB Inc Class A.
iShares Global Tech ETF (IXN)
iShares Global Tech ETF is formerly known as iShares Global Tech ETF. This fund seeks investment returns that follow the S&P Global 1200 Information Technology Sector Index's price and yield performance.
The pandemic caused IXT to drop to $155.91, but the fund has recovered since then and even surpassed its pre-pandemic price. iShares Global Tech now trades at $321.55.
VanEck Vectors Semiconductor ETF (SMH)
VanEck Vectors Semiconductor ETF tries to replicate the price and yield performance of the MVISÂ® US Listed Semiconductor 25 Index, which is the index that tracks the performance of the largest US companies that generate 50% of their revenues from semiconductors. The fund's top three holdings include Taiwan Semiconductor Manufacturing Co Ltd ADR, NVIDIA Corp., and ASML Holding NV ADR. SMH trades in the market with a $253.23 NAV.
ARK Next Generation Internet ETF (ARKW)
ARK Next Generation Internet ETF (ARKW) is the first on this list that doesn't necessarily track an index. Instead, ARKW is an actively managed fund that invests in large-cap growth stocks of companies in artificial intelligence (AI), big data, cloud computing, cybersecurity, and blockchain technology.
This fund has $8.76 billion in assets under management and has a year-to-date return of 24.58%. It currently trades at $186.53.
ARK Innovation ETF (ARKK)
ARK Innovation ETF is another ARK Invest actively managed fund. But for this particular ETF, the focus is not purely on tech companies but on "disruptive innovations." The fund has exposure to companies involved in Artificial Intelligence, DNA technologies, energy innovation, automation and manufacturing, financial technology, and cloud computing.
ARKK's 1-year performance is 116.4% and recently traded at a NAV of $155.43.
O'Shares Global Internet Giants ETF (OGIG)
Finally, the O'Shares Global Internet Giants ETF makes it to this list. This fund seeks to track the performance of the O'Shares Global Internet Giants Index and will typically invest 80% of its assets to the index's components. OGIG launched in 2018 and now has net assets worth $708 million.
The fund's latest close was $63.68, with a year-to-date daily total return of 2.65%.
Expert Tip on Investing In Tech ETFs
Since volatility rules over tech stocks, they may have more considerable downside risks. So, as a countermeasure, you can hedge your position by short-selling a broad market ETF such as the SPDR S&P 500 ETF or the SPDR Dow Jones Industrial Average ETF. But this may not be the best option for you to realize gains because it only offsets potential losses with the gains from another trade. Therefore, a put option would be the more appropriate hedging measure, as this allows you to have the right but not the obligation to sell the underlying ETF. However, this requires a deeper understanding of financial derivatives that can do more harm than good if misused.
Why Trade Tech ETFs?
Investing in tech ETFs provides diversified exposure to stocks that could likely generate above-average returns in a portfolio. As touched on earlier, tech companies have been the primary growth driver in this new market rally. So, buying a tech ETF is an opportunity to jump in the trend of another bull market, one that especially rose from the ashes of the 2020's coronavirus-induced crash.
Still, it is worth keeping in mind not to put all your eggs in one basket. Despite tech ETFs offering immediate diversification on a volatile sector, it will still exhibit a somewhat similar movement, which is why you should always allocate funds to low-risk assets to keep everything balanced.
Frequently Asked Questions
The number one tech ETF is Vanguard Information Technology Index Fund ETF; it has net assets under management worth $46.46 billion.
The recent growth among tech companies after the pandemic-induced market crash is a compelling reason to join an ongoing trend that could last a few years.
Apart from retail investors, the institutions that hold ETFs include wealth managers, banks, investment advisors, hedge funds, etc.
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, and it is because tech ETFs are the same as mutual funds in that fund managers are responsible for conducting much of the fund's investment decision-making. This removes the process of analyzing individual stocks, which beginners may find hard to do.
It's estimated that the tech sector is worth $1.9 trillion, which is the third-largest sector in the U.S. economy.