Tech is Back. 3 ETFs to Invest in the Sector

After a terrible 2022, the tech sector was left for dead by many investors. But in 2023, tech is back, and big tech stocks are surging after posting positive results during the current round of earnings. Microsoft (NASDAQ:MSFT) kicked things off by beating estimates on earnings and revenue, with its cloud results, in particular, impressing investors and analysts.

Next, while its share price didn’t get as big a boost as Microsoft’s, Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) joined Microsoft in beating consensus estimates and added $70 billion to its share repurchase program. Additionally, Meta Platforms (NASDAQ:META) handily beat both top and bottom-line expectations, as daily active users grew and ad revenue recovered, leading shares to surge by 14% at writing.

Investors are awaiting Amazon’s (NASDAQ:AMZN) results later today, but in any case, earnings season has given a jolt to the tech sector.

Tech leaders are posting impressive results, and another appealing aspect of the tech sector is that after 2022’s challenges, many of these companies are leaner and more profitable than they were before. Even better for investors, this increased profitability means that valuations are more palatable than they were a few years ago.

For example, even after a massive ~100% gain year-to-date in 2023, Meta Platforms still trades at a P/E of 25 when factoring in its most recent results. While this isn’t dirt cheap, it’s still trading at around the average multiple of the broader market. Meanwhile, Alphabet is even cheaper, trading at 20.3 times earnings even after gaining 22% year-to-date.

For readers who want to invest in this tech resurgence, using ETFs is a convenient and effective way to gain broad exposure to the sector as a whole instead of investing in each individual company. If you are just getting started investing, ETFs can help you to harness the power of the entire sector in your portfolio. Therefore, here are three leading tech-oriented ETFs with investor-friendly expense ratios that give investors undiluted exposure to top tech stocks.

If you’re looking for exposure to top tech stocks, the Invesco QQQ Trust, often called “The Q’s” by investors, is a great place to start. With $169 billion in AUM, this is the fifth-largest ETF in the world and one of the most popular. 

Because it invests in the tech-centric Nasdaq 100 (NDX) index, QQQ is a quick and simple ETF for investors to gain exposure to large cap tech as a whole. QQQ holds 102 positions, and its top 10 holdings make up 55% of the fund. This is because tech giants like Apple (NASDAQ:AAPL) and Microsoft have double-digit weightings, while stocks like the aforementioned Meta Platforms, Amazon, and Alphabet also have relatively heavy weightings.

Further, semiconductor giants like Broadcom (NASDAQ:AVGO) and Nvidia (NASDAQ:NVDA) are jointed by Tesla (NASDAQ:TSLA) in the top 10. The only non-tech company in this list is Pepsi (NASDAQ:PEP), which occupies this spot because it is one of the largest stocks listed on the Nasdaq.    

Below, you’ll find an overview of QQQ’s top holdings using TipRanks’ Holdings tool, which gives investors key data about an ETF’s portfolio. 

QQQ’s top holdings boast an impressive collection of Smart Scores, with 7 out of the 10 enjoying Smart Scores of 8 or better, equivalent to an Outperform rating. QQQ itself has an impressive ETF Smart Score of 8. The Smart Score is TipRanks’ proprietary quantitative stock scoring system that evaluates stocks on eight different market factors. The result is data-driven and does not require any human intervention. 

In addition to this strong group of holdings and heavy exposure to large cap tech, QQQ features a favorable expense ratio of just 0.2%, meaning that an investor putting $10,000 into QQQ would pay just $20 in fees over the course of the year.

Additionally, QQQ has a great long-term track record, with annualized returns of 19.8%, 15.7% and 17.7% over the last three, five, and 10 years, respectively (as of March 31), becoming the de facto flagship ETF for tech at large, making it a worthy starting point for investors looking to invest in this exciting segment of the market. 

Is QQQ Stock a Buy, According to Analysts?

Analysts view QQQ stock as a consensus Moderate Buy, and the average QQQ stock price target of $361.70 implies 13.4% upside potential from here.

The Vanguard Information Technology Index Fund is a popular tech ETF from ETF and mutual fund manager Vanguard, with $44 billion in assets under management. It has an even lower expense ratio than QQQ at just 0.1%, meaning that if you were to allocate $10,000 into VGT, you’d pay a negligible $10 in fees in year one. 

While QQQ gets its tech exposure by investing in the Nasdaq 100, VGT “employs an indexing investment approach designed to track the
performance of the MSCI US Investable Market Index (IMI)/Information
Technology 25/50, an index made up of stocks of large, mid-size, and small U.S. companies within the information technology sector,” according to the funds prospectus.

VGT holds even more stocks than QQQ, with 366 positions, although, like QQQ, its top 10 holdings dominate the fund, making up 61.9% of assets. Therefore, for an ETF holding 366 positions, VGT isn’t necessarily as diversified as it looks at first glance, but if you are looking for undiluted exposure to big tech, this isn’t necessarily a bad thing.

Apple makes up an incredible 22.8% of holdings, while Microsoft accounts for 18.1%. VGT shares a few other top holdings with QQQ, including Nvidia and Broadcom. Other top 10 positions include Cisco Systems (NASDAQ:CSCO), Salesforce (NYSE:CRM), Accenture (NYSE:ACN), Adobe (NASDAQ:ADBE), and payment giants Visa (NYSE:V) and Mastercard (NYSE:MA).

While some investors may question why these legacy payments networks are in a technology fund, it’s because they are at the forefront of the fintech revolution. Plus, these stocks have been incredible compounders over the years, so having them in the fund is certainly not a bad thing. Check out an overview of VGT’s top holdings below.

As is the case with QQQ, VGT’s holdings have some impressive Smart Scores, as 8 out of the 10 feature Smart Scores of 8 or better. Apple, Nvidia, Visa and Accenture all feature ‘Perfect 10’ scores, and VGT itself has an ETF Smart Score of 8.

VGT also has a very solid performance track record, with annualized returns of 23.1%, 18.8%, and 19.5% over the past three, five and 10 years, respectively, making this ETF another solid choice for tech investors. 

Is VGT Stock a Buy, According to Analysts?

Like QQQ, analysts view VGT stock as a Moderate Buy, and the average VGT stock price target of $427.70 implies similar upside potential of 13%.

Lastly, the Technology Select Sector SPDR Fund from State Street Global covers the technology sector of the S&P 500 (SPX). This popular ETF is smaller than QQQ but similar in size to VGT, with $42 billion in AUM.

XLK holds fewer positions than QQQ and VGK with 68 holdings. Furthermore, its top 10 holdings make up 69.3% of the fund. While Apple takes up a large amount of VGT, it occupies an even larger position in XLK, with a 23.6% weighting.

But it isn’t even the largest holding here — after its recent runup, Microsoft makes up 24.3% of the fund. In essence, Apple and Microsoft together are nearly half of XLK, so despite the fact that it has 68 holdings, this is a very top-heavy ETF. 

Below is a look at XLK’s top 10 holdings.

XLK also boasts an impressive long-term track record, with annualized returns of 24.5%, 19.5%, and 19.1% over the past three, five and 10 years.

Is XLK Stock a Buy, According to Analysts?

Like the other two funds, analysts collectively rate XLK stock as a Moderate Buy, and the average XLK stock price target of $165.01 represents 11.2% upside potential from current prices.

Investor Takeaway

With low fees, outstanding long-term track records, and significant exposure to tech, all three of these ETFs are great starting points for investors who want to allocate money toward tech. Top tech stocks are leaner and more profitable than they were in the past, and their valuations look more palatable.

Furthermore, over the long term, advances like artificial intelligence (AI), workflow automation, growing cloud adoption, and other emerging tech trends will continue to drive these stocks forward.

My personal favorite of the three is QQQ since it is more diversified and isn’t quite as beholden to Microsoft and Apple as XLK and VGT are, reducing the risk of one of these stocks underperforming.