There are some ETFs that are clearly investor and trader’s favorites. When it comes to tech ETFs, the Technology Select Sector SPDR Fund (XLK) is the runaway leader. The XLK covers all the major tech stocks in the S&P 500 (.SPX) and includes plenty of top hardware, software, semiconductors and services muscle. Add in its low expense ratio as well as its nearly 4 million shares per day trading volume and it’s easy to see why investors have put more than $20 billion in the ETF.
However, as awesome as the XLK is as a core tech fund, it isn’t the only fish in the sea. There are plenty of other tech ETFs out there.
And in many cases, these specialized ETFs may offer something better than the popular XLK. Investors just gravitating to the XLK may actually be doing themselves a disservice. Thinking outside the box could lead to better returns.
But what other tech ETFs are worthy of your time? Here are five that could give the popular XLK a run for its money.
Invesco S&P SmallCap Information Technology ETF
Perhaps one of the biggest hits against the XLK is that it’s full of the big boys — the Microsofts (MSFT), the Alphabets (GOOG), etc. There’s nothing wrong with these stocks, it’s just many of the current and future leaders in tech are actually much smaller. And in this case, if you’re looking for pure growth, then small-cap tech stocks should be where you focus your attention.
And that’s why the Invesco S&P SmallCap Information Technology ETF (PSCT) should be on your list.
PSCT is just like the XLK, only this time it tracks all the tech stocks in the small-cap focused S&P 600 (.SML). This currently includes 88 different stocks. Top holdings include networking equipment maker Viavi Solutions (VIAV) and cloud computing communications firm 8×8 Inc (EGHT). The makeup of the ETF is a bit different as well — with electronic components and semiconductors making up the top sector weightings.
That makeup and focus on smaller tech stocks haven’t hurt the ETF on the performance front. PSCT has managed to post an average annual return of 18% over the last five years. That beats the broader S&P 600 and comes close to the XLK’s performance.
All in all, with more than $300 million in assets and a low 0.28% — or $28 per $10,000 invested — expense ratio, the PSCT is one of the best tech ETFs outside the XLK.
ARK Innovation ETF
Active management works and can beat indexing when a) fund managers keep their funds small and b) when they take concentrated bets in only a handful of stocks. And that’s just what Catherine Wood and her team do at the ARK Innovation ETF (ARKK).
ARK looks for stocks conducting so-called “disruptive innovation.” Basically, any new technology that potentially changes the way the world works. The firm focuses its attention on four core areas — the genomic revolution, industrial innovation, the next generation internet and fintech innovation.
From here, Wood will select the best ideas and run a pretty concentrated portfolio of usually just 35 to 55 stocks. And she tends to sticks to her guns. For example, Wood bought tons of Tesla (TSLA) during its last meltdown.
Say what you will about Wood and her views on TSLA. But the concentrated strategy has worked for ARKK. Over the last three years, ARKK has managed to post a whopping 43% average annual return. That smashes the XLK over that time by a wide margin.
Perhaps the only downfall for ARKK is that its rather expensive at 0.75% in annual costs. However, if Wood can keep up the gains, that’s a small price to pay to own one of the best performing tech ETFs out there.
iShares Exponential Technologies ETF
If you like the idea of innovation and transformative tech, but don’t think an active manager can make the right calls, then the iShares Exponential Technologies ETF (XT). XT uses an index approach to get the job done.
XT tracks the Morningstar Exponential Technologies Index. Exponential technologies are defined as advances which “displace older technologies, create new markets and have the potential to create significant positive economic benefits.” This includes everything from 3-D printing and robotics to genomics/personalized medicine and data mining.
The beauty is that XT doesn’t just track strictly tech stocks like the XLK. It looks at all sectors to find these disruptors. There’s plenty of industrials, healthcare and even real estate firms in the ETF. The fund currently 200 different global stocks — with top holdings including ServiceNow (NOW), Align (ALGN) and First Solar (FSLR).
Performance-wise, XT has been great. Through the end of April, the ETF has managed to produce an 18.70% annual return over the last three years. That’s not too shabby. Even better is that XT has been less volatile than some other tech ETFs including the XLK. This is due to it not focusing purely on tech.
Either way, with expenses clocking at 0.47%, XT makes a great choice for those investors looking to add some tech ETFs to their portfolios.
First Trust ISE Cloud Computing Index Fund
Perhaps one of the biggest and most immediate advances in the tech sector has to be cloud computing. Every time you’ve used an app on your phone or accessed a data center at work, you’ve used the power of the cloud.
Increasingly, our information and programs are being stored off-site. Software as a Service (SaaS) has become big business. That’s why the First Trust ISE Cloud Computing Index Fund (SKYY) could be one of the best tech ETFs to buy.
SKYY tracks the ISE Cloud Computing Index. The underlying index looks for firms that provide network hardware/software, storage, cloud computing services or those firms that deliver goods and services that utilize cloud computing technology.
Preference is placed on those stocks that are pure cloud computing plays with tech conglomerates or those firms only derive a portion of their revenues from the cloud receiving a smaller weighting.
The ETF is fairly concentrated with relatively few holdings. Top stocks include Salesforce.com (CRM), SAP (SAP) and VMware (VMW).
That explosive nature of cloud computing has helped propel SKYY one of the best performing tech ETFs around. Over the last three years, the fund has produced a 22% annual return.
Expenses for SKYY clock in at just 0.60%.
The KraneShares CSI China Internet ETF
Silicon Valley isn’t the only place where tech innovation is happening. In fact, China has just as many global tech stock giants as the U.S. In looking for alternative ETFs to the XLK, heading to the Dragon Economy could be a smart bet and the KraneShares CSI China Internet ETF (KWEB) could be the way to access the opportunity.
KWEB tracks an index of China-based companies whose primary business are in internet-related sectors. The ETFs holdings read like a who’s who of internet retailers, social media, gaming, travel and commerce sites in the nation.
This includes giants like Alibaba (BABA), NetEase (NTES) and JD.com (JD). With the ETF, you’re basically getting the Facebook’s (FB) and Amazon’s (AMZN) of China.
Given the sheer size of China’s population and the growth of the internet in the nation, KWEB could be a solid long term bet for investors looking to expand their tech holdings. However, don’t expect a smooth ride. The fund has been pretty volatile — especially these days as the trade war has persisted. But the longer term looks rosy for China and its growth.
With nearly $1.69 billion of assets and a 0.75% expense ratio, KWEB is the prime way to get a piece of the action.
Disclosure: At the time of writing Aaron Levitt was long AMZN and XT.
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