A Better Tech ETF Than the QQQ?

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Nvidia’s recent earnings blowout has brought the tech sector back into focus.

While individual stocks like Nvidia can produce epic returns, counterparts like Super Micro Computer can add more volatility than some prefer.

So, it makes sense that the Technology Select Sector SPDR Fund (XLK) would be at the top of the search results for financial pros.

However, there’s more to this ETF than meets the eye.

While you would assume with 69 different positions, this ETF would be a great way to invest in the sector with some diversification.

However, that isn’t necessarily the case.

Key Facts About XLK

• Net assets: $70.3 billion
• 12-month trailing yield: 0.68%
• Inception: December 16, 1998
• Expense ratio: 0.09%
• Number of holdings: 69

With a history stretching back nearly three decades, the XLK is a market-cap-weighted technology ETF holding the largest technology companies in the U.S.

This includes both tech providers and support services like Accenture.

Source: State Street

Because of the market-cap-weighted approach, almost half of the index is controlled by two stocks – Nvidia and Microsoft.

This isn’t always the case.

In fact, back in May, Microsoft accounted for 23% while Apple was 21% of the weighting, with Nvidia at just 5%.

Clearly the rebalancing can have a substantial impact on what you end up with.

Currently, that leaves the index dominated by semiconductors and software companies.

Source: State Street

Performance

Despite the massive swings in the ETF’s holdings, the overall performance of the ETF is strong, with average annual gains of 23.2% over the past five years and 20.4% over the past decade.

Source: State Street

Competition

Since technology is our focus, we pulled the other top tech ETF searches by financial pros. And while most are thematic, there’s one with a much more diversified tech basket.

• VanEck Vectors Semiconductor ETF (SMH): With a focus on semiconductors, the SMH takes a market-cap based approach to holding the top 25 U.S. listed companies in the industry.
• First Trust NASDAQ Technology Dividend Index Fund (TDIV): targets tech and telecom companies paying dividends, offering a blend of growth and income, weighted by modified dividend value, ensuring that larger dividend payers have more influence.
• Vanguard Information Technology ETF (VGT): A rock-bottom cost ETF with over 320 holdings while still taking a market-cap-weighted approach.
• First Trust NASDAQ CEA Cybersecurity ETF (CIBR): Focuses on companies in the cybersecurity industry, using a modified market-cap weighting

Our Opinion 7/10 

While the XLK demonstrates solid performance and is quite liquid, its extreme concentration isn’t something we like to see.

We prefer the VGT, which, although Apple, Microsoft, and Nvidia make up 17.2%, 15.8%, and 14.1% of the weighting, respectively, is still better balanced than the XLK.

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