3 Tech ETFs to Diversify Your Portfolio - InvestingChannel

3 Tech ETFs to Diversify Your Portfolio

Proprietary Data Insights

Top ETF Searches This Month

#1SPDR S&P 500 ETF1,072,628
#2Invesco QQQ Trust Series 1410,844
#3ProShares UltraPro QQQ104,287
#4ProShares UltraPro Short QQQ88,305
#5United States Natural Gas Fund86,131
#ad You Need to Know About Alternative Investments

Different Types of ETFs 

For a few days in February, starting today, The Juice is focusing on ETF – exchange-traded fund – investing. 

We’ll go from the basics to deep in the weeds. 

For example, today we start with a primer on investing in indexes via ETFs. Then, we detail the differences among three types of ETFs that provide exposure to technology stocks. 

Because it was a rough year for the market, we focus on 2022 performance to illustrate the distinctions in both areas. 

The Actual Index

Don’t confuse an index ETF with the actual index. To color this disclaimer, we use the Nasdaq.

There’s the Nasdaq Composite Index (.IXIC), which tracks the performance of  almost all Nasdaq stocks. 

Then there’s the Nasdaq-100 Index (NDX), which tracks the performance of the 100 largest nonfinancial companies from the Nasdaq Composite. 

Then there’s the ETF product you’ve probably heard of, the Invesco QQQ Trust Series 1 (QQQ), which tracks the performance of the Nasdaq-100. Day in and day out, it ranks among the most searched ETFs in Trackstar, our proprietary sentiment indicator. 

Source: Google Finance

This look at 2022 YTD performance of all three tickers shows virtually identical (and ugly) returns. 

While it makes sense that the QQQ ETF and the Nasdaq-100 mirror one another, you might wonder why the larger Nasdaq Composite which contains more than 3,000 stocks delivered basically the same performance last year. 

It’s because the top 100 nonfinancial Nasdaq stocks account for roughly 90% of the movement in the broad Nasdaq Composite. This is due to the size of these 100 largely tech companies. 

There’s also an ETF that aims to mirror the Nasdaq Composite’s performance: the Fidelity Nasdaq Composite Index ETF (ONEQ). Unsurprisingly, it posted a negative return of around 33% in 2022. 

Of course, the Nasdaq-100 and the QQQ are tech-heavy. This is where things get interesting. Scroll with us to dig deeper into the composition of tech-focused ETFs for one way to construct a well-rounded tech-stock portfolio. 

And later this month, we’ll look at constructing portfolios from other sectors as well as the broad stock market.

ETF Investing

3 Tech ETFs to Diversify Your Portfolio

Key Takeaways:

  • Buying a seemingly broad and popular index fund doesn’t necessarily make for a comprehensive portfolio. 
  • One beautiful thing about ETFs is that there are so many of them doing so many different things. 
  • It doesn’t take much digging to find a few to construct a solid portfolio within a particular sector or the broad stock market. 

First, look at the following chart. We’ll make sense of it in a second. 


Source: Google Finance

Whereas the tickers we showed you in the first section of today’s Juice all produced around -33% returns for 2022, there’s more variation among the three ETFs in the chart above (though all still had negative returns): the aforementioned QQQ, the Technology Select Sector SPDR Fund (XLK), and the ProShares S&P Technology Dividend Aristocrats ETF (TDV).

We picked these three because they represent one way to achieve some diversification through tech-ETF investing. 

With QQQ, you get: 

  • An ETF that tracks the Nasdaq-100
  • A tech-heavy ETF of 101 stocks with the top 10 holdings accounting for nearly 51% of the fund’s portfolio, as of the end of 2022. The top 10 and their weightings: 
    • Microsoft (MSFT): 12.45%
    • Apple (AAPL): 11.85%
    • Amazon.com (AMZN): 6.11%
    • Alphabet Class C (GOOG): 3.84%
    • Alphabet Class A (GOOGL): 3.82%
    • Nvidia (NVDA): 3.41%
    • Tesla (TSLA): 2.73%
    • Meta Platforms (META): 2.42%
    • PepsiCo (PEP): 2.29%
    • Broadcom (AVGO): 2.04% 

Lots of exposure to big tech, but it’s hardly diversified. If you put all your eggs in QQQ in 2022, you went down with the ship. 

With XLK, you get:

  • An ETF that tracks the performance of the tech sector of the S&P 500 Index (SPX)
  • A still Nasdaq-heavy ETF that holds tech stocks from other exchanges, particularly the New York Stock Exchange
  • More diversification. But as of the end of 2022, Apple and Microsoft accounted for roughly 44% of the ETF’s holdings, at 22.28% and 21.86%, respectively. No other single stock accounts for more than 5% of XLK’s composition, with a majority weighted at less than 2%. The diversification is also partly thanks to broadening the scope away from only the Nasdaq and using the larger S&P 500 universe 

With TDV, you get:

  • Something completely different!
  • An ETF that tracks the performance of the S&P Technology Dividend Aristocrats Index
  • A more evenly distributed portfolio of roughly 40 stocks, each accounting for between 2% and 4% of the ETF’s composition. For example, as of the end of 2022, the top holdings were KLA (KLAC) at 3.13%, Broadcom at 3.00%, and Mastercard (MA) and Oracle (ORCL) tied for third at 2.73% apiece. Apple and Microsoft made up just 4.46% of the fund, at allocations of 2.12% and 2.34% each. 
  • No Tesla, because TDV invests only in tech stocks that not only pay dividends (Tesla doesn’t), but that also have track records of increasing their dividend payments annually.
  • TDV plays somewhat fast and loose with the “dividend aristocrats” label because, typically, we consider a stock an aristocrat if it has increased its dividend payment for at least 25 consecutive years. TDV requires only seven years of increases. We expand on this in tomorrow’s Juice when we cover dividend investing via ETFs. 

The Bottom Line: As today’s tutorial makes clear, ETF investing in tech goes beyond QQQ. As you move into different types of tech-focused ETF products, you increase your diversification, particularly from an exposure standpoint. 

For example, while Apple and Microsoft dominate QQQ and XLK, they’re relatively small players in TDV. TDV’s additional requirement of dividends created not only a different landscape of stocks and weightings, but also relatively better performance in 2022. 

In tomorrow’s Juice, we focus on dividend investing with ETFs and repeat this exercise by highlighting differences in composition and returns for a few of the many dividend ETFs at your disposal.

Want to get content like this directly to your inbox? Then we urge you to sign up for our newsletter here

Related posts

Advisors in Focus- January 6, 2021

Gavin Maguire

Advisors in Focus- February 15, 2021

Gavin Maguire

Advisors in Focus- February 22, 2021

Gavin Maguire

Advisors in Focus- February 28, 2021

Gavin Maguire

Advisors in Focus- March 18, 2021

Gavin Maguire

Advisors in Focus- March 21, 2021

Gavin Maguire