For technology-stock investors, the last three years have been a roller coaster. Those who boarded at the start of 2020 enjoyed a swift climb upward, as the Morningstar US Technology Index nearly doubled the Morningstar US Market Index over the ensuing two years. But that momentum ground to a halt in 2022, when tech indexes spiraled further than the broad market.
Now, a resurgent first quarter has left some fund investors wondering how to boost their technology stake. Sector ETFs like Technology Select Sector SPDR ETF XLK are the most direct way, but there are better-diversified portfolios that favour the tech sector as well. Here are a few of the best.
3 Solid ETFs That Favour Tech Stocks
- Vanguard Mega Cap Growth ETF MGK
- Vanguard ESG U.S. Stock ETF ESGV
- FlexShares Quality Dividend ETF QDF
The Mega Cap Contender
First up: Vanguard Mega Cap Growth ETF, ticker MGK. Backed by a sound construction and razor-thin fee, this fund carries a Morningstar Analyst Rating of Silver.
This fund tracks the CRSP U.S. Mega Cap Growth Index, which sweeps in stocks that represent the faster-growing half of the mega-cap market and weights them by market capitalization. Tech stocks are more popular in growth funds than value, and that rings especially true in the market’s upper echelon. Over half this portfolio comprised technology stocks as of February 2023—about 6 percentage points more than the Russell 1000 Growth Index.
MGK favours the tech sector because that’s where the market’s heaviest hitters currently reside. At the end of February 2023, its top two holdings—Apple AAPL and Microsoft MSFT—constituted over 30% of the portfolio. If investors can stomach that concentration, they receive a solid mega-cap growth portfolio and a heavy dose of technology in return.
The ESG Alternative
Vanguard ESG U.S. Stock ETF is next on the docket. It trades under the ticker ESGV and earns a Morningstar Analyst Rating of Silver.
This index strategy’s benchmark deploys a light-touch ESG approach. It starts with the FTSE All Cap Index and excludes companies involved in controversial lines of businesses, controversies, and those with substandard diversity practices. The remaining stocks—normally about 1,500 of them—are market-cap-weighted, creating an attractive balance between sustainability and broad diversification.
The fund does not seek out tech stocks, but its allocation to them hovers around 30% of the portfolio—normally about 4 percentage points more than the Morningstar US Market Index. Technology firms earn the extra weight because they tend to measure up well in sustainability metrics. With lighter fixed assets than most companies in the energy or industrials sectors, tech firms usually earn solid marks in the “E” section of ESG.
Why Not Both Dividends and Tech?
FlexShares Quality Dividend ETF, ticker QDF, rounds out today’s trio. This fund follows a savvy blueprint that features high-quality dividend stocks and keeps unrewarded risks at bay. It too earns a Silver Morningstar Analyst Rating.
This fund uses an optimizer to balance three objectives: 1) deliver better yield than the broad market, 2) maximize exposure to the quality factor, and 3) mimic the market sensitivity of a broad stock index. It has delivered on these aspirations, rewarding investors with solid performance over the past decade.
This fund, which sits in the large-value Morningstar Category, also ties its sector composition to the broad market. That roped 27% of the portfolio into tech stocks as of March 2023—nearly 20 percentage points more than the Russell 1000 Value, its category index. The fund counts semiconductor companies Broadcom AVGO, Applied Materials AMAT, and Nvidia NVDA among its top 25 holdings—all of which are absent from the Russell 1000 Value. For investors that want to boost their tech exposure while maintaining a value tilt in their portfolio, QDF could be worth a look.
