Growing investments in digital transformation, the shift to cloud-based services, and the adoption of new-age technologies are all boosting the tech industry’s growth prospects. While this could be the right time to invest in the space, the high-interest rate environment could have varied impacts on different tech businesses, making it risky to invest in specific stocks.
Therefore, a relatively safer approach to capitalize on the industry’s growth prospects could be to have exposure to buckets of tech stocks by investing in promising tech ETFs. To that end, Vanguard Communication Services Index Fund (VOX), Technology Select Sector SPDR Fund (XLK), and Vanguard Information Technology Index Fund (VGT) could be wise portfolio additions now.
Before diving deeper into these ETFs, let’s discuss what’s happening in the tech space.
Tech has become pivotal, almost nondiscretionary, in the success of any organization. Tech companies are facilitating the digital transformation journeys of various enterprises.
Enterprises are swiftly transitioning from traditional software applications to cloud-based software services. Cloud technology aims to provide rapid, scalable access to computing resources and IT services. Moreover, adopting emerging technologies like generative AI will likey boost the tech industry’s growth.
Software companies with subscription-based business models are expected to benefit from integrating generative AI into their applications. Goldman Sachs estimates that the total addressable market (TAM) of the generative AI software is approximately $150 billion. Additionally, the move to 5G wireless networks is underway. The increased bandwidth offered by 5G could enable several industries to shift to autonomous systems.
Gartner expects worldwide IT spending to grow 3.5% year-over-year to $4.69 trillion in 2023.
Considering these conducive industry trends, let’s evaluate the three Technology Equities ETF picks, starting with number 3.
ETF #3: Vanguard Communication Services Index Fund (VOX)
VOX is managed by The Vanguard Group, Inc. The fund invests in stocks of companies operating across communication services sectors. It invests in growth and value stocks of companies across diversified market capitalization. The fund seeks to track the performance of the MSCI US Investable Market Index (IMI)/Communication Services 25/50.
With $3.06 billion in assets under management, VOX’s top holding as of September 30, 2023, is Meta Platforms, Inc. (META), with a 20.15% weighting, followed by Alphabet Inc. (GOOGL), with a 12.65% weighting. It has a total of 117 holdings.
VOX has an expense ratio of 0.10%, lower than the category average of 0.37%. VOX’s fund inflows were $173.79 million over the past six months and $212.94 million over the past year. It currently has a NAV of $104.74.
The ETF pays an annual dividend of $1.12, which yields 1.07% on the current price. It has a four-year average dividend yield of 0.91%.
VOX has gained 27.3% year-to-date and 25% over the past year to close the last trading session at $104.69.
VOX’s POWR Ratings reflect this promising outlook. The ETF’s overall B rating equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
VEA has an A for Peer and a B for Buy & Hold and Trade. Of the 119 ETFs in the B-rated Technology Equities ETFs group, it is ranked #11. Click here to access all of VOX’s POWR Ratings.
ETF #2: Technology Select Sector SPDR Fund (XLK)
XLK was launched by State Street Global Advisors, Inc. It is managed by SSGA Funds Management, Inc. The fund invests in stocks of companies operating across information technology sectors. It invests in growth and value stocks of companies across diversified market capitalization. The fund seeks to track the performance of the Technology Select Sector Index.
With $48.23 billion in AUM, the fund has a total of 64 holdings. XLK’s top holding is Microsoft Corporation (MSFT), with a 24.46% weighting, followed by Apple Inc. (AAPL), with a 23.17% weighting, and Broadcom Inc. (AVGO), with 4.35%.
XLK has an expense ratio of 0.10%, lower than the category average of 0.57%. It currently has a NAV of $167.20. Its fund inflows were $345.57 million over the past six months.
The fund’s annual dividend of $1.40 yields 0.84% on the current share price. Its four-year average yield is 0.92%. Its dividend payouts have increased at a CAGR of 5.5% over the past three years and 7.8% over the past five years.
XLK has gained 34.4% year-to-date and 31.9% over the past year to close the last trading session at $167.18.
XLK’s strong outlook is reflected in its POWR Ratings. The ETF has an overall rating of B, translating to a Buy in our proprietary rating system.
It has an A grade for Peer and a B for Buy & Hold and Trade. It is ranked #3 in the same group. To access all the POWR Ratings for XLK, click here.
ETF #1: Vanguard Information Technology Index Fund (VGT)
VGT is managed by The Vanguard Group, Inc. The fund invests in stocks of companies operating across information technology sectors. The fund invests in growth and value stocks of companies across diversified market capitalization. The fund seeks to track the performance of the MSCI US Investable Market Index (IMI)/Information Technology 25/50.
With $58.10 billion in AUM, VGT’s top holding is Apple Inc. (AAPL), with a 21.26% weighting, followed by Microsoft Corporation (MSFT), with a 17.06% weighting, and NVIDIA Corporation (NVDA), with 6.17%. It has a total of 319 holdings.
VGT has an expense ratio of 0.10%, lower than the category average of 0.57%. VGT’s fund inflows were $326.72 million over the past six months. It currently has a NAV of $414.49.
The fund’s annual dividend of $3.20 yields 0.77% on the current share price. Its four-year average yield is 0.85%. Its dividend payouts have increased at a CAGR of 13.2% over the past five years.
VGT has gained 29.8% year-to-date and 26.5% over the past year to close the last trading session at $414.49.
VGT’s POWR Ratings are consistent with its promising outlook. The ETF has an overall B rating, which equates to Buy in our proprietary rating system.
It also has a B grade for Buy & Hold and Peer. It is ranked #2 within the Technology Equities ETFs group. To access VGT’s POWR Rating for Trade, click here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
VGT shares rose $5.51 (+1.33%) in premarket trading Thursday. Year-to-date, VGT has gained 32.25%, versus a 12.80% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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