With the stock market stumbling in the past month or so, some investors have understandably been looking for the best places to put their money amid the uncertainty. Trade war worries and concerns about an economic slowdown are also fueling investor anxiety.
Technology stocks haven't been immune to this increased volatility, and many of the latest sell-offs have come from the sector. But avoiding tech investments entirely isn't the right move. There are many promising technology trends, including artificial intelligence (AI), that could fuel many tech stocks for years to come.
It's possible to wisely invest in tech right now without too much exposure to risk if you choose the right technology exchange-traded fund (ETF). Here's one to buy right now and one to avoid.
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Buy the Vanguard Information Technology ETF
If you're unfamiliar with the Vanguard Information Technology ETF (VGT +1.72%), here are some important reasons it's worth your consideration:
- You'll get exposure to more than 300 technology companies.
- It has outperformed the S&P 500 over the past decade.
- You'll pay one of the lowest ETF expense ratios available.
First, the significant exposure to hundreds of companies is especially important right now because of market volatility. Diversifying your investment across many companies gives you a better chance of riding it out.
The Vanguard Information Technology ETF follows the MSCI US Investable Market Information Technology 25/50 Index, which has a rule that no single stock accounts for more than 25% of the fund, and the sum of the stocks with weights above 5% cannot exceed 50% of the index. That means no overexposure to either small caps or too many mega-cap stocks.
Second, while there's no guarantee of future gains, this fund has been an exceptional performer over the past decade, delivering total returns of 473%, compared to the S&P 500's 221%. This shows just how well the tech sector can outperform the broader market.
Data by YCharts.
That doesn't mean it will continue on that path, or that it will beat the S&P 500 to the same degree in the coming years. But tech trends are often a large part of the market's gains, and a tech-focused ETF may benefit more from specific exposure to these trends, like AI, than the S&P 500 as a whole will.
Lastly, this ETF has a very low expense ratio. Vanguard charges some of the lowest fees for its ETFs, and its Information Technology ETF has a low annual fee of just 0.09%. This means that for every $10,000 you invest in the fund, you'll pay just $9 annually.
Avoid Cathie Wood's risky ARK Innovation ETF
Cathie Wood has made some good calls on tech investments in the past, and her ARK Innovation ETF (ARKK +2.44%) has become a popular fund among tech investors. But amid market volatility and a potential economic slowdown, it's not the best one to buy right now.
First, the ARK Innovation fund isn't well diversified. It owns just 36 stocks, compared to the Vanguard Information Technology ETF with over 300. This means that if a handful of the tech stocks drop during a down market, the fund's value is more likely to tumble as well.
The ARK Innovation fund also has significant exposure to just a few stocks. For example, Tesla is its largest holding, accounting for 10% of the fund. That's been unfortunate for the fund considering that Tesla's share price has plunged 45% over the past three months. When a fund has fewer stocks in it and some of them account for large percentages of it, there are going to be some significant price swings.
data by YCharts.
Next, the fund is more expensive than Vanguard's. The ARK Innovation ETF charges 0.75% annually, which equals a cost of $75 each year for every $10,000 in the fund. That's more than 8 times more expensive than Vanguard's fund.
Actively managed funds like ARK Innovation often cost more than passively managed funds like Vanguard's technology fund, but investors don't often benefit. Research from Morningstar shows that about 75% of actively managed funds underperform their passive peers over a 10-year period.
This is true for ARK Innovation, which has a 10-year total return of 158%, compared to 473% for Vanguard's Information Technology ETF.
The ARK Innovation fund could, of course, outperform Vanguard's fund in the future. But with its higher expense ratio, the tendency for actively managed funds to underperform passive funds, and its limited diversification, investors are far better off buying the Vanguard Information Technology ETF right now.
