The tech sector has had a roller coaster of a year. The tech-heavy Nasdaq Composite, one of the U.S. stock market's three main indexes, lost 20% of its value from the start of the year through April 8. Since then, it has surged over 37% (as of Aug. 5).
Despite the volatility, the tech sector is still poised to produce great long-term gains. If you're interested in adding tech stocks to your portfolio, I recommend considering a tech-focused exchange-traded fund (ETF). It can allow you to take advantage of the sector's growth potential while limiting the risks that come with investing in individual stocks.
There are plenty of tech ETFs to choose from, but there's one popular option I would load up on, and one popular option I would avoid right now.
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The tech ETF I would load up on right now
The tech ETF I would consider right now is the Invesco QQQ Trust ETF (QQQ 0.93%), the second-most traded in the U.S. It mirrors the Nasdaq-100, a subset of the Nasdaq Composite.
Whereas the Nasdaq Composite contains virtually every stock trading on the Nasdaq stock exchange, the Nasdaq-100 only tracks the largest 100 nonfinancial companies in the index. The tech sector is over 60% of QQQ.
QQQ has been a consistent market-beater since its March 1999 inception. In that span, its price is up close to 1,000%, far more than the S&P 500's roughly 390%. In the past decade, it has averaged 17.5% annual returns, compared to the S&P 500's 11.6% average.
It's a tough ask for QQQ to continue its 17.5% average, but it has all the tools to continue beating the market long term. In the past 20 years, it has outperformed the S&P 500 in 14 years. The only exceptions were 2005, 2006, 2008, 2016, 2021, and 2022.
The ETF I would avoid right now
The tech ETF I would avoid is the Vanguard Information Technology ETF (VGT 0.85%). It's one of Vanguard's largest ETFs by assets under management, but recent changes in its holdings have added more risk than I'd personally prefer to take on right now.
VGT is a much broader ETF, focusing on U.S. companies of all sizes in the information technology (tech) sector. My main reason for avoiding VGT right now is its high concentration in three stocks: Nvidia, Microsoft, and Apple. All three are in both VGT and QQQ, but they're much more heavily weighted in VGT:
| Company | Percentage in VGT | Percentage in QQQ |
|---|---|---|
| Nvidia | 16.74% | 9.99% |
| Microsoft | 14.89% | 9.18% |
| Apple | 13.03% | 7.13% |
Data source: Vanguard and Invesco. VGT percentages as of June 30. QQQ percentages as of July 31.
Having three stocks represent over 44% of a 319-stock ETF is far from ideal from a diversification perspective. And in all fairness, three stocks representing 26% of a 100-stock ETF doesn't scream diversification either, but there's still a noticeable difference between the two.
QQQ also includes top-tier tech companies that are noticeably absent from VGT, such as Amazon, Meta Platforms, and Alphabet. Those are three of the most influential tech companies in the world, and if I'm investing in an ETF for its tech exposure, those are definitely companies that I would want included.
One aspect that VGT has over QQQ
Despite my preference for QQQ, I can't ignore the one thing VGT has going for it over QQQ: its expense ratio. QQQ's current expense ratio is 0.20% compared to VGT's 0.09%. It might not seem like much on paper, but it could make a difference in your returns if both ETFs were to have similar returns.
Despite this, I would still lean toward QQQ because of its inclusion of more megacap tech stocks and its lower reliance on Nvidia, Microsoft, and Apple.
