After years of leading the market forward, tech stocks their shine in 2022. Rampant inflation and rising interest rates dampened investor interest in tech stocks, especially unprofitable ones or ones trading at demanding valuations.
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While some correction was probably warranted after years of outperformance, the sell-off perhaps went too far. This is evident in the way that tech stocks are roaring back so far in 2023. Several factors are behind tech’s rebound — animal spirits are returning to the tech sector thanks to growing investor interest in advances in artificial intelligence (AI).
Furthermore, high-profile tech companies like Meta Platforms, Salesforce, and Sea Limited seem to be getting the market’s message and placing a new emphasis on profitability and managing expenses. Investors are greeting this shift in focus with enthusiasm.
Lastly, some investors believe that the Fed’s interest rate hikes will slow in pace this year. With this changing backdrop in mind, here are three top tech ETFs investors can add to their portfolios to gain exposure to tech’s rebound.
Invesco QQQ Trust (QQQ)
The Nasdaq has always been associated with technology and innovation, and the Invesco QQQ Trust is tailor-made to track the Nasdaq 100. This is a massive ETF with almost $162 billion in assets under management (AUM). As one would expect from a tech-heavy fund, QQQ fell 32.5% and has rallied to a 13.9% gain in 2023.
Because the Invesco QQQ Trust replicates the 100 largest stocks in the Nasdaq, QQQ’s top 10 holdings are essentially a who’s who of large-cap tech companies like Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL), Alphabet (NASDAQ:GOOGL), Amazon (NASDAQ:AMZN) and Meta Platforms. Also included are chip stocks like Nvidia (NASDAQ:NVDA) and Broadcom (NASDAQ:AVGO), along with the world’s largest automaker by market value, Tesla (NASDAQ:TSLA). Consumer staples stalwart Pepsi (NASDAQ:PEP) is a non-tech stock in the top 10. QQQ holds 102 stocks, and these top 10 holdings account for 53% of the fund.
QQQ features an investor-friendly expense ratio of just 0.2%. Additionally, it pays a dividend and currently yields 0.7%.
The Invesco QQQ Trust also screens positively based on a number of other indicators. It has an ETF Smart Score of 8, indicating an Outperform rating, and the consensus is that QQQ is a Moderate Buy. The average QQQ stock price target of $348.90 indicates upside potential of 15.9% versus current levels.
Technology Select Sector SPDR Fund (XLK)
While QQQ focuses on the tech-heavy Nasdaq 100, the Technology Select Sector SPDR Fund is an ETF from State Street that invests in the technology sector of the S&P 500. XLK’s top holdings overlap with those of QQQ, as Apple, Microsoft, Nvidia, and Broadcom are represented in the top 10 of both funds.
However, one difference between the two ETFs is that XLK’s top holdings include payment networks like Visa (NYSE:V) and Mastercard (NYSE:MA). This is because these stocks are listed on the NYSE rather than the Nasdaq. While they are perhaps not immediately associated with tech, these mega caps can be considered fintech companies.
The Technology Select Sector SPDR has 78 positions, and its top 10 holdings make up 67.9% of the fund.
XLK fell 27.7% in 2022, but it has stormed out to a 13.4% gain so far in 2023.
The Technology Select Sector SPDR Fund has an ETF Smart Score of 8 and a Moderate Buy consensus rating from analysts. Blogger sentiment and news sentiment are both bullish, while crowd wisdom is negative. Additionally, hedge fund involvement is decreasing.
XLK isn’t quite as large as QQQ, but this is still a major ETF, with $42 billion in AUM. While QQQ features an investor-friendly expense ratio of 0.2%, XLK features an even more appealing expense ratio of just 0.1%. Like QQQ, XLK also pays a dividend and currently yields a slightly higher 0.9%.
ARK Innovation ETF (ARKK)
While QQQ and XLK have a lot in common, investors can think of the ARK Innovation ETF as a supercharged version of these ETFs. ARKK amplifies both the good and bad aspects of the tech sector. When the market is negative on tech stocks and in risk-off mode, ARK Innovation struggles. But when investor enthusiasm for tech is high, and the market returns to a more risk-on sentiment, ARK Innovation outperforms.
This is evident in its recent performance. ARKK fell much further than XLK or QQQ last year, with a 67% decline. However, while XLK and QQQ have rallied this year, ARKK has outperformed them with a turbo-charged rally of 37.4% year-to-date.
This is because ARKK places more of a focus on “disruptive innovation.” While these companies boast potentially impressive technologies, some of them are not yet profitable or trade at higher multiples, so these are higher-risk, higher-reward holdings.
It means that you won’t see steady stocks like Pepsi, Visa, or Mastercard in ARKK’s top holdings. Instead, you’ll find stocks like Coinbase (NASDAQ:COIN), Unity Software (NYSE:U), Spotify (NYSE:SPOT), Shopify (NYSE:SHOP), and Block (NYSE:SQ). One thing that ARKK has in common with QQQ is a top 10 position in Tesla. In ARKK’s case, Tesla is the fund’s top holding, and it accounts for over 10% of the fund.
Additionally, ARKK is more concentrated than QQQ or XLK, with just 30 holdings. Its top 10 holdings make up 62.4% of the fund. While QQQ and Nasdaq track indices, ARKK’s holdings are at the discretion of ARK’s portfolio management team. The ARK Innovation ETF has a higher expense ratio than the other two ETFs, coming in at 0.75%. ARKK does not pay a dividend like the ETFs discussed above, and it’s a smaller fund than QQQ and XLK, with $7.9 billion in AUM.
ARKK has an ETF Smart Score of 5, indicating a Neutral rating. Blogger sentiment is also neutral, while crowd wisdom is very negative. Interestingly, analysts collectively view ARKK as a Hold, but the average ARKK stock price target of $48.54 indicates upside potential of 18.8%.
Investor Takeaway
All three of these tech-centric ETFs are off to strong starts in 2023 as investor enthusiasm for tech returns. These ETFs are likely to continue performing well if interest rates remain under control this year, big-tech companies continue to focus on profitability, and AI continues to capture the imagination of investors.
If the market turns south, all three of these ETFs could suffer. Nevertheless, XLK and QQQ likely offer more ballast than ARKK in the event of another downturn in tech sentiment thanks to their focus on large-cap tech, their broader range holdings, and their dividends. However, if the market remains hot, ARKK will likely outperform them.
One strategy investors interested in tech could consider employing is holding either QQQ or XLK and then a smaller position in ARKK to capture some of the upside while maintaining lower risk.
