5 Top-Ranked ETFs To Tap The Red-Hot Technology Sector

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The technology sector has once again become an investors’ darling. The combination of easing inflation, upbeat corporate earnings, the regional bank crisis, and the adoption of new-era technologies are driving the sector higher.

As a result, investors bullish on the sector may consider tech stocks in a basket form. While there are many options available in the space, we have highlighted five ETFs that are popular and offer broad exposure across different industries in the sector. These include Technology Select Sector SPDR Fund (XLK - Free Report), Vanguard Information Technology ETF (VGT - Free Report), iShares U.S. Technology ETF (IYW - Free Report), MSCI Information Technology Index ETF (FTEC - Free Report) and iShares Expanded Tech Sector ETF (IGM - Free Report). These funds have a Zacks ETF Rank #2 (Buy), suggesting their continued outperformance.

Easing Inflation

Inflation in the United States slowed down for the tenth consecutive month in April. The consumer price index rose 4.9% in April, down from a 5% rise in March and a 40-year high of 9.1% last June. This is the smallest yearly increase since April 2021. On a monthly basis, prices rose 0.4% following a 0.1% increase in March. The data strengthened optimism about a Fed pause on rate hikes next month. Fed funds futures traders are now pricing in an 86% chance that the Fed will leave rates unchanged in its June meeting and 14% odds of another 25-bps hike.

A pause in interest rate increases is a positive sign for technology stocks. As the tech sector relies on borrowing for superior growth, it is cheaper to borrow more money for further initiatives when interest rates are low.

Upbeat Earnings

Part of the appeal was driven by better-than-feared results from some of the world's largest companies. The five biggest tech players — Microsoft (MSFT - Free Report), Amazon (AMZN - Free Report), Meta Platforms (META - Free Report) Alphabet (GOOGL - Free Report), and Apple (AAPL - Free Report) — came up with strong results, spreading huge optimism into the sector.

Total Q1 earnings for 83.9% of the sector’s market cap are down 13.2% on 3.4% lower revenues, with 81.7% beating EPS estimates and 83.3% beating revenue estimates. The growth rates and beat percentages align with the decelerating trend seen since last year but have shown modest improvement from the preceding period.

Regional Bank Crisis

The sector was also powered by investors’ flight to mega-cap, cash-rich technology stocks amid the regional bank crisis and the rising risk of a recession. The mega-cap tech stocks have strong balance sheets, durable revenue streams and robust profit margins and are, thus, better positioned to withstand a possible economic downturn.

Other Factors

The sector outlook remains solid given the global digital shift that has accelerated e-commerce for everything, ranging from remote working to entertainment and shopping. The rapid adoption of cloud computing, big data, the Internet of Things, wearables, VR headsets, drones, virtual reality, artificial intelligence, machine learning, digital communication, blockchain, and 5G technology should drive the sector higher.

Let’s dig into the details of the above-mentioned ETFs:

Technology Select Sector SPDR Fund (XLK)

Technology Select Sector SPDR Fund follows the Technology Select Sector Index and holds about 64 securities in its basket. It has key holdings in software, technology hardware, storage & peripherals, and semiconductors & semiconductor equipment.

Technology Select Sector SPDR Fund is the most popular and heavily traded ETF, with AUM of $43 billion and an average daily volume of 7 million shares. The fund charges 10 bps in fees per year.

Vanguard Information Technology ETF (VGT)

Vanguard Information Technology ETF manages about $46 billion in its asset base and provides exposure to 364 technology stocks. It currently tracks the MSCI US Investable Market Information Technology 25/50 Index. Technology hardware storage & peripheral, systems software, semiconductors and application software are the top four sectors.

Vanguard Information Technology ETF has an expense ratio of 0.10%, while volume is solid at nearly 511,000 shares.

iShares U.S. Technology ETF (IYW)

iShares Dow Jones US Technology ETF tracks the Russell 1000 Technology RIC 22.5/45 Capped Index, giving investors exposure to 139 U.S. electronics, computer software and hardware, and informational technology companies. Software & services, tech hardware & equipment, semiconductors & semiconductor equipment, and media & entertainment are the top four sectors with double-digit exposure each.  

iShares Dow Jones US Technology ETF has AUM of $10.6 billion and charges 39 bps in fees and expenses. Volume is good as it exchanges 644,000 shares a day.

MSCI Information Technology Index ETF (FTEC)

MSCI Information Technology Index ETF is home to 361 technology stocks, with AUM of $6 billion. It follows the MSCI USA IMI Information Technology Index.

MSCI Information Technology Index ETF has an expense ratio of 0.08%, while volume is solid at 219,000 shares a day.

iShares Expanded Tech Sector ETF (IGM)

iShares Expanded Tech Sector ETF offers broad exposure to the technology sector, and technology-related companies in the communication services and consumer discretionary sectors. It tracks the S&P North American Expanded Technology Sector Index, holding 327 stocks in its basket. From a sector look, semiconductors, interactive media & services, and systems software make up for double-digit exposure each.

iShares Expanded Tech Sector ETF has AUM of $2.8 billion and charges 40 bps in annual fees. It trades in a moderate volume of nearly 23,000 shares a day on average.

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