Technology was 2020’s best performer.
The S&P 500’s information technology sector had the best performance of all sectors in 2020 — despite the first-quarter drop — returning 44% versus 16% for the broader index. With that type of performance, investors may be interested in tech index funds to buy this year. While some analysts believe that cyclical stocks in sectors such as energy and consumer discretionary may do better in 2021 as the economy rebounds, Kristina Hooper, chief global market strategist for Invesco, says don’t count out tech. She continues to favor some tech sector exposure, as she expects “many tech stocks to continue to benefit from trends that accelerated during the pandemic.” Here are seven tech index funds to consider.
First Trust Dow Jones Internet Index Fund (ticker: FDN)
Looking for an exchange-traded fund that tracks an index of the largest and most liquid U.S. internet companies? FDN is that ETF, says Jonathan Howard, certified financial planner at SeaCure Advisors. The index is a mix of internet commerce and services stocks, and to be included, the majority of a company’s revenue must come from the internet. In addition to holding companies such as Amazon.com (AMZN) and Facebook (FB), pandemic staple Zoom Video Communications (ZM) is in FDN’s top 10 holdings. The fund is sector-independent, Howard notes, since technology can have a broad meaning for some investors. FDN has an annual expense ratio of 0.52%, or $52 for every $10,000 invested.
Vanguard Information Technology ETF (VGT)
Sector ETFs, such as those that focus on technology, can be niche products. VGT is relatively diversified, with 343 holdings, Howard says. The fund uses the sector definitions to create the index, so while it includes Microsoft (MSFT), Apple (AAPL) and Intel Corp. (INTC), it does not include Facebook and Alphabet (GOOG, GOOGL). While it has more holdings than most technology ETFs, it is still heavily concentrated, as Apple and Microsoft alone make up 36% of the fund. Howard says that type of concentration is not unusual for tech funds, so investors will need to look at weighting if that is an issue for them. The fund has $42 billion in assets under management and a very low expense ratio of 0.1%.
Invesco S&P 500 Equal Weight Technology ETF (RYT)
RYT is an equal-weight index fund of S&P 500 tech companies, so no one name dominates the fund, Howard says. What that means is the top 10 holdings only make up about 15% of the 76 names in the entire fund. Because of that, it has an overweight sector tilt to semiconductors, which makes up about 25% of RYT. Howard likes that. Investing in semiconductors is buying companies that are the underlying framework for how tech companies operate. “You’re buying the soil and not the plant,” he says. That could make semiconductors a good long-term play, he adds. The fund costs 0.4% annually to hold.
Defiance Next Gen Connectivity ETF (FIVG)
Solita Marcelli, chief investment officer, Americas, for UBS Global Wealth Management, says the transition to 5G, or fifth generation tech, is “inevitable” and is becoming increasingly attractive from an investment standpoint. There are two reasons why she likes it: Post-pandemic, 5G will form a core component of the next generation of IT infrastructure to support a greater virtual and distributed world. Plus, she says, 5G investing focuses on more cyclical technology companies, rather than the recent secular growth trend. There are a few 5G ETFs, but FIVG bills itself as “the first.” The fund tracks a tier-weighted index of global equities related to 5G networks. The radio access network tech subsector makes up nearly 40% of the fund, which currently holds about $1 billion in assetss. The ETF costs 0.3% annually.
Communication Services Select Sector SPDR Fund (XLC)
XLC is the first index ETF dedicated to communications services, Howard says. Although it has “massive exposure” to Facebook and Alphabet, the fund also has a number of video game companies, including Activision Blizzard (ATVI), Electronic Arts (EA) and Take-Two Interactive Software (TTWO). It also includes streaming giant Netflix (NFLX) and entertainment titan Walt Disney Co. (DIS). “It holds a lot of companies that people have personal relationships with, which I think really does matter, especially when you’re really talking about a buy-and-hold strategy,” Howard says. This is a newer fund, as it was started in 2018 when S&P created the communications sector. XLC comes with an expense ratio of 0.13%.
Emerging Markets Internet & Ecommerce ETF (EMQQ)
Jim Paulsen, chief investment strategist at The Leuthold Group, says the U.S. dollar has been trending weaker since about May 2020 and shows no signs of stopping. Historically, a weaker dollar supports emerging markets, such as in the early 1990s and 2000s, he says. An example of an ETF that invests in emerging-market tech stocks is EMQQ. It tracks a cap-weighted index of companies producing most of their revenue from the internet and e-commerce sectors. It’s a large fund with about $1.7 billion in assets. The fund returned more than 70% last year. EMQQ’s heaviest international exposures are to Hong Kong, China and South Korea, although it also holds some U.S. companies. The fund has an expense ratio of 0.86%.
Amplify International Online Retail ETF (XBUY)
While a weaker U.S. dollar historically supports emerging markets, Paulsen says, any international market can benefit. Another example of an ETF that offers international exposure to the growing e-commerce market is XBUY, which offers a more diversified approach than EMQQ. The fund follows the EQM International Ecommerce Index, which is comprised of companies that derive at least 90% of their revenue from online transactions or e-commerce platforms. It also equally weights stocks to limit concentration. Although XBUY has exposure to China, Japan takes the top spot in country exposure. It costs 0.69% annually to hold, making it a cheaper international fund.
Seven of the best tech index funds:
— First Trust Dow Jones Internet Index Fund (FDN)
— Vanguard Information Technology ETF (VGT)
— Invesco S&P 500 Equal Weight Technology ETF (RYT)
— Defiance Next Gen Connectivity ETF (FIVG)
— Communication Services Select Sector SPDR Fund (XLC)
— Emerging Markets Internet & Ecommerce ETF (EMQQ)
— Amplify International Online Retail ETF (XBUY)
