The Best Way to Buy Tech Stocks

The technology sector is the largest sector by weight in the S&P 500. Nearly one of every five stocks, including the top two — Apple (AAPL) and Microsoft (MSFT) — in the benchmark U.S. index are tech stocks.

The Best Way to Buy Tech StocksWhen it comes to the best way to invest tech, many investors are apt to think that method is with a single stock. Regaled by tales of what investing $1,000 in Apple in 2000 or Microsoft in 1987 would be worth today, it is easy to see why the single-stock idea has so many disciples.

However, stock-picking is a burden. What all those pundits on financial television that say “this is a stock picker’s market” fail to tell you is that stock-picking is another term for active management … and as years of data substantiate, most active managers badly fail to achieve returns on par with those offered by passively managed index funds.

So the best way to buy tech stocks isn’t to buy the stocks themselves, it’s to buy funds.

And when it comes to funds dedicated to tech stocks, investors have a veritable potpourri from which to choose.

There are nearly 50 exchange-traded funds dedicated to tech stocks, and that doesn’t even include ETFs such as the PowerShares QQQ Trust (QQQ), which allocates more than half of its weight to tech equities. (Nor does that figure include countless mutual funds that sport hefty tech exposure.)

But in the end, one tech ETF beats the rest:

The Best Way to Buy Tech Stocks

With that in mind, the nominee, and in reality, the winner for the best way to invest in tech stocks is the Vanguard Information Technology ETF (VGT).

Arriving at this conclusion is not easy because the Vanguard Information Technology ETF, as we noted above, has plenty of competition — namely from the Technology SPDR (XLK), the largest tech ETF.

VGT is no small ETF. It has $7.6 billion in assets under management, though that is about $5 billion less than XLK. QQQ, the Nasdaq-100-tracking fund, certainly merits a place in the tech ETF conversation … but investors should remember that QQQ also features a combined weight of about 35% to consumer discretionary and healthcare stocks, a trait that diminishes the tech purity of the fund.

That does not make QQQ a “bad” option for investors looking for tech exposure. Actually, it is a great option for the investor seeking some exposure to tech stocks without the “all-in” commitment of a fund like VGT or XLK.

However, those in the market for a dedicated tech ETF can do a lot worse than VGT, and there are some big reasons why.

  • First, there is the superficial. VGT charges just 0.12% per year, or $12 per $10,000 invested, putting the Vanguard offering in a tie with the Fidelity MSCI Information Technology Index ETF (FTEC) for the honor of least expensive tech ETF. Given Vanguard’s penchant for lowering fees on its ETFs, it would not be surprising to see VGT’s annual fee one day drop below 0.1%, though we should note no announcement has been made to that effect.
  • Second, VGT offers a “deep bench” strategy. One of the primary reasons for buying any ETF is the utility the investors get from gaining exposure to multiple stocks. VGT offers that in spades with 392 holdings. That is more than triple the number of stocks held by QQQ and more than five times the number of constituents found in XLK.
  • Like its rival XLK, VGT is heavily allocated to familiar names like Apple, Microsoft, Facebook (FB) and International Business Machines (IBM), among others. However, the big difference is XLK only culls its holdings from tech stocks that reside in the S&P 500, whereas VGT is not bound by that restriction.
  • Although the median market value of VGT’s holdings is almost $145 billion, according to Vanguard data, the ETF has just enough exposure to smaller tech stocks to produce a significant advantage in terms of total returns over long holding periods. For example, VGT surged 58.9% for three years ended Aug. 7 while XLK was up 50.8% over the same period.

Bottom Line

While VGT, and any tech ETF for that matter, is bound to lag the performances of its best components in a given period, the ETF will also prove sturdier than its worst-performing holdings.

Combine that, robust liquidity, scant fees and the removal of the stock-picking burden, and Vanguard’s VHT is a credible option for the best way to invest in tech stocks.

As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.

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