The technology sector — the S&P 500’s largest sector weight — is rebounding at the start of the new year following a lackluster showing in 2018. As of Friday, Jan. 25, the Technology Select Sector SPDR (NYSEARCA:XLK) and the Invesco QQQ (NASDAQ:QQQ), were up an average of 6.75% year-to-date after losing an average of 0.90% last year.
Still, an array of factors could become headwinds for the technology sector, but earnings growth has been steady. As of Jan. 25, 88% of S&P 500 technology companies delivered quarterly results that beat expectations. On the other hand, the sector, to this point, accounts for a small percentage of positive fourth-quarter earnings surprises.
Another metric indicates the technology sector, a cyclical, is showing some signs of slowing down.
“As of January 9 the blended revenue growth rate, a measure that includes analyst estimates and reported results, is just 1.7% year over year, according to Reuters data,” reports Forbes. “That’s lagging every other sector except for utilities.”
In the current environment, investors considering technology exchange-traded funds (ETFs) ought to be selective. Here are some of the best tech ETFs for investors to consider right now.
First Trust NASDAQ Technology Dividend Index Fund (TDIV)
Expense Ratio: 0.50%, or $50 annually per $10,000 invested
In recent years, the technology sector has become an increasingly prominent part of the domestic dividend picture. While the Technology Select Sector Index yields just 1.59%, the good news on that front is that the sector’s yield implies ample room for dividend growth. Enter the First Trust NASDAQ Technology Dividend Index Fund (NASDAQ:TDIV), one of the best tech ETFs for dividend seekers.
TDIV targets the NASDAQ Technology Dividend Index and holds nearly 100 stocks. This tech ETF does not have a dividend increase requirement, but its underlying index does mandate the existence of a dividend, a yield of at least 0.50% and no negative dividend actions in the past year.
International Business Machines (NYSE:IBM), Microsoft (NASDAQ:MSFT) and Cisco Systems (NASDAQ:CSCO) combine for almost a quarter of TDIV’s weight. Those stocks have been dependable dividend growers and buyers of their own shares in recent years.
Speaking of those themes, dividends and buybacks this year should at least be in line with last year’s tallies.
“PMorgan estimates that S&P 500 companies will spend $800 billion on stock buybacks and $500 billion on dividends in 2019, in line with last year’s totals, according to Bloomberg,” notes First Trust.
Direxion NASDAQ-100 Equal Weighted Index Shares (QQQE)
Expense Ratio: 0.35%
While many investors think the best tech ETFs are cap-weighted funds, such as the aforementioned QQQ and XLK, that thesis was dealt a harsh blow earlier this month when Apple (NASDAQ: AAPL) delivered an earnings warning that sent the iPad maker tumbling.
“We had sort of a collection of items going on. Some that are macroeconomic and some that are Apple specific,” said Apple CEO Tim Cook in an interview with CNBC. “And we’re not going to sit around waiting for the macro to change. I hope that it does and I’m actually optimistic, but we are going to focus really deeply on the things we can control.”
Put simply, the Direxion NASDAQ-100 Equal Weighted Index Shares (NYSEARCA:QQQE) is one of the best tech ETFs for investors looking to avoid the concentration risk associated with many cap-weighted tech funds. In fact, QQQE is up nearly 10% YTD, easily outpacing the cap-weighted QQQ.
Each of QQQE’s holdings has a weight of 1%.
Invesco S&P 500 Equal Weight Technology ETF (RYT)
Expense Ratio: 0.40%
Keeping with the theme of equal-weight funds, the Invesco S&P 500 Equal Weight Technology ETF (NYSEARCA:RYT) is a different animal from the aforementioned QQQE because RYT focuses exclusively on tech stocks. The $1.48 billion RYT, one of the largest equal-weight ETFs on the market, follows the S&P 500 Equal Weight Information Technology Index.
This is one of the best tech ETFs for investors looking for dedicated tech exposure without depending on Apple and Microsoft as primary drivers of the fund’s returns. In fact, those stocks are not even top 10 holdings in RYT.
RYT is also one of the best tech ETFs for investors looking to reduce dependence on large-cap stocks. While the ETF’s 68 holdings have an average market value of $90.33 billion, nearly 40% of the fund’s holdings are classified as mid caps.
BUZZ US Sentiment Leaders ETF (BUZ)
Expense Ratio: 0.75%
The BUZZ US Sentiment Leaders ETF (NYSEARCA:BUZ) is another one of the best tech ETFs for investors that do not want a dedicated tech fund. BUZ has well-documented advantages that can help investors tap into social sentiment investing, something pros have been doing for years.
BUZ tracks the BUZZ NextGen AI US Sentiment Leaders Index and the aim of that index is to identify the 75 stocks with the most bullish social sentiment readings. That means BUZ is sector agnostic, but it is common for one of the best tech ETFs to have a weight to technology stocks of 35% to 40% or more. At the end of the third quarter, BUZ’s tech weight was more than 39% and six of its top 10 holdings were tech stocks.
After outperforming some well-known growth and momentum funds last year, BUZ is already one of 2019’s best tech ETFs with a gain of nearly 10%.
ARK Innovation ETF (ARKK)
Expense Ratio: 0.75%
As is the case with some of the other funds highlighted here, the ARK Innovation ETF (NYSEARCA:ARKK) is not a dedicated tech ETF, but it is one of the best tech ETFs.
“Companies within ARKK include those that rely on or benefit from the development of new products or services, technological improvements and advancements in scientific research relating to the areas of DNA technologies (‘‘Genomic Revolution”), industrial innovation in energy, automation and manufacturing (‘‘Industrial Innovation’’), the increased use of shared technology, infrastructure and services (‘‘Next Generation Internet’), and technologies that make financial services more efficient (‘‘Fintech Innovation’’),” according to the issuer.
ARKK, which usually holds 35 to 55 stocks, currently allocates about 63% of its combined weight to the healthcare and technology sectors. Tech exposures include cloud computing, Internet of Things (IoT), big data and autonomous vehicles.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.