Tech stocks got crushed in 2022, with the Nasdaq Composite, a proxy for the sector, falling more than 33%. But with inflation showing signs of cooling and the bulk of the Federal Reserve's interest rate hikes potentially in the rearview, it is possible that tech will rebound at some point.
Still, investors will likely have some reservations after a difficult year in 2022 and may not be ready to dive back into the sector headfirst just yet. By their very nature, exchange-traded funds (ETFs) are generally less risky than individual stocks because these vehicles hold a basket of stocks.
But many ETFs overly exposed to the tech sector struggled greatly last year. Here's one that soundly beat the broader tech sector last year and offers a good way for investors to get good tech exposure with less risk.
Solid fundamentals and durability
The ProShares S&P Technology Dividend Aristocrats ETF (TDV +0.27%) is an ETF that tracks the performance of the proprietary S&P 500 Technology Dividend Aristocrats Index, whose methodology selects companies that have paid and raised their dividends for seven consecutive years. The ETF also focuses on more established names with long track records of profitability.
As you can see, the ProShares S&P Technology Dividend Aristocrats ETF held its own in difficult market conditions in 2022, slightly beating the broader market and widely outperforming the broader tech sector. The top 10 holdings in the ETF make up more than 28% of the fund and include the following:
- Paychex: 3.01%
- Analog Devices: 3%
- NetApp: 2.97%
- Qualcomm: 2.89%
- Microsoft: 2.86%
- Broadcom: 2.86%
- Visa: 2.83%
- Amphenol: 2.67%
- National Instruments: 2.66%
- Automatic Data Processing: 2.65%
These are large established companies in various tech subindustries, including the semiconductor space, human resources software management, payments, and cloud processing. Several of these companies have already built strong moats, when you think about Microsoft and all the digital subcategories it operates in, as well as Visa, which operates one of the world's largest payment rails. The size and scale of each of these companies enabled them to turn profits last year, despite the struggles with their stocks.
PAYX Net Income (TTM) data by YCharts. TTM = trailing 12 months.
These companies have also demonstrated strong balance sheets with healthy levels of debt, enabling them to survive and navigate difficult environments like what we saw in 2022 and could see this year if there is a recession.
PAYX Financial Debt to Equity (Quarterly) data by YCharts.
A more measured approach to tech
There's quite a lot to like about the ProShares S&P Technology Dividend Aristocrats ETF. It presents large, established companies growing in a multitude of promising areas within the tech sector.
These companies also generate consistent passive income, regularly make a profit, and boast very strong balance sheets. There's no guarantee that tech will bounce back this year, but tech is still the future, and the companies in this ETF are well positioned to generate good long-term value without the risk of many other companies in the space.
