The best tech ETFs

The tech sector is growing rapidly, so if you’re looking to invest here, you can buy a technology exchange-traded fund (ETF). Technology ETFs are an easy way to build a technology portfolio, allowing you to get into the field if you think it’s going to run higher – and you can do it without analyzing individual companies. ETFs also offer diversification, reducing the risk for you compared to buying a few individual stocks.

Best technology ETFs
Best technology ETFs

What are the main types of technology ETFs?

The field of technology is very large and for the purpose of classification, it is called “information technology” as part of the GICS classification system. That system divides the technology sector into three main sectors:

Software and services – This industry group includes software companies and IT service companies.
Technology hardware and equipment – This group consists of three main areas: communication equipment; technology hardware, storage and peripherals; and electronic equipment, tools and components.
Semiconductors and semiconductor equipment – This group includes semiconductor “chip” companies and those that manufacture support equipment.
If you’re looking for broad exposure to technology, you can find investment funds in the field, giving you a diverse audience of players.

What to look for in an ETF

When investing in an ETF, it’s helpful to consider some aspects of each ETF so that you actually buy what you think you’re buying. Here are three important things to look for:

Sub-sectors – Each sub-sector may react differently to developments in the industry. For example, software companies will react differently to growing demand than semiconductor companies, which often have to deal with the cyclicality of that sub-sector. So you need to know what kind of company your ETF owns.
Investment track record – The ETF’s track record can give you an indication of how the fund might operate in the future, although there are no guarantees. Did ETFs perform better or worse than the industry? Subdevelopments can greatly influence performance, as not all technology sub-sectors operate equally.
Cost Ratio – Pay attention to the cost ratio, which tells you the annual cost of owning the fund as a percentage of your total investment in it.
Finally, it should be noted that larger ETFs tend to charge a lower cost ratio, as they can spread fund operating costs across more assets. So the cheapest funds can often be the largest, and low cost ratios are an important measure of what constitutes a top ETF.

Here are some of the best tech ETFs to consider for your portfolio.

The best tech ETFs

1. Best Software & Service ETF

iShares ETF Extended Technology-Software Area (IGV)

This ETF tracks an index that includes North American software companies and interactive media companies. The top stocks include Salesforce, Microsoft and Adobe.

5-year profit (annual): 29.6% (as of December 22, 2021)

Cost ratio: 0.43 percent

Dividend yield: n/a

2. Best Internet ETFs

ARK Internet Next Generation ETF (ARKW)

This actively managed ETF invests in foreign companies listed in the United States and in the country in line with the theme of the next generation of the internet, including cloud computing, payments, Big Data, and the Internet of Things.

5-year income (annual): 42.0% (as of December 22, 2021)

Cost ratio: 0.83 percent

Dividend yield: n/a

3. Best Semiconductor ETF

iShares Semiconductor ETF (SOXX)

This ETF tracks an index that includes U.S. listed stocks in the semiconductor industry. Its top stocks include Nvidia, Broadcom and Intel.

5-year profit (annual): 35.3% (as of December 22, 2021)

Cost ratio: 0.43 percent

Dividend yield: 0.6%

4. Best Diversified Technology ETF

Vanguard Information Technology ETF (VGT)

This ETF tracks the benchmark index of the information technology sector, giving investors the opportunity to diversify in the sector. Top stocks include Apple, Microsoft and Nvidia.

5-year (annual): 31.2% (as of December 22, 2021)

Cost ratio: 0.10 percent

Dividend yield: 0.62 percent

Investing in 5G technology

Another technology sector expected to grow significantly in the coming years is 5G telecommunications. 5G refers to fifth-generation mobile networks, which are expected to be significantly faster than previous generations, allowing users to connect more easily in increasing numbers.

While we often consider smartphones to be the main beneficiaries of this innovation, other sectors will also benefit as more things are connected to the internet. Companies like Apple (AAPL) and Verizon (VZ) appear to be well positioned to take advantage of 5G deployments, as do automakers such as Ford (F) and Tesla (TSLA) or semiconductor companies like Nvidia (NVDA) or Micron Technology (MU).

But if you’re not sure exactly which company makes the best 5G game, then there are some ETFs that may be worth a look.

Defiance 5G Next Gen Connectivity ETF (FIVG): This ETF invests in dozens of companies that are likely to benefit from the development of 5G. The fund held 88 companies as of December 2021 and comes with a cost ratio of 0.30%.
First Trust IndXX NextG ETF (NXTG): The fund takes a slightly more diverse approach, none of the 100 holdings accounting for more than 2% of the portfolio’s assets. It comes with a hefty cost rate of 0.70 percent annually.
Esoterica NextG Economy ETF (WUGI): This ETF is more concentrated than the first two funds, with just over 30 stocks holding and about 60% of the fund in the top 10 positions as of December 2021. It will cost more for a more aggressive approach, with a cost ratio of 0.75 percent.
How to invest in a technology ETF

ETFs can make it easier for individual investors to invest in the tech sector, but given the various dynamic industries that are taking place, you still need to know some of the sub-sectors you’re investing in. While some sectors perform well almost perennial, others may be more cyclical and have more booms and busts, depending on their specific dynamics.

The ETFs above offer you a highly liquid way of investing in the tech sector, but you’ll want to look carefully at what areas you’re investing in. If you want to invest in the growth of the well-known semiconductor industry cyclically, you may want a fund that focuses solely on that industry group. If you’re right, you can enjoy even bigger profits than you’ll earn with more diversified tech ETFs.

Similarly, you may want to invest in one of the hottest sectors of the market – software companies. The big appeal of software is that these companies can operate with huge profits as they increase their sales. Because the increased cost of selling software is low, every incremental dollar of sales can add a large portion to pre-tax profits.

The bottom line

Investors who want exposure to the tech sector have a number of different options to play it, from funds investing in sub-sectors to investment funds across the sector. So it’s important to know which sector you’re investing in as well as the potential risks and returns offered by each ETF. For this reason, some investors stick with broadly diversified index funds, such as funds based on the Standard & Poor’s 500 index, and don’t worry too much about the ups and downs of the industry.

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