Most of the largest companies in the world today are involved in technology-related industries. Their financial successes, as well as their shareholder returns, have certainly drawn the attention of investors. Given its growth history and its bullish outlook, it makes sense for retail investors to put some of their money to work in this lucrative part of the economy.
It's not difficult to find exchange-traded funds (ETFs) that can provide this tech-sector exposure -- but some are undoubtedly better than others. Here's one tech ETF I'd recommend buying hand over fist and one to avoid.
Image source: Getty Images.
Buy the Invesco QQQ Trust
The tech ETF that investors should scoop up today is the Invesco QQQ Trust (QQQ -1.04%). It tracks the performance of the Nasdaq-100 index, which includes the 100 largest non-financial companies that trade on the Nasdaq stock exchange. That makes it a more concentrated investment vehicle than the S&P 500 index, for example.
A notable 61% of the QQQ's holdings come from the technology sector. The "Magnificent Seven" combine to make up 44% of this ETF's asset allocation. Overall, their share price performances in recent years have definitely had major positive impacts on the QQQ.
Among the powerful secular trends in the economy today are the growth of cloud computing, digital payments, digital advertising, streaming entertainment, and e-commerce. We also can't forget about artificial intelligence, a revolutionary technology that is likely to become more important in our lives. Investors can gain exposure to companies capitalizing on all of these trends and more through the Invesco QQQ Trust.
Its low cost is another key selling point. The Invesco QQQ Trust carries an expense ratio of 0.2%. So on a hypothetical $1,000 investment, Invesco charges just $2 per year in management fees.
The bigger reason to buy this ETF is performance. Over the past five years (as of Aug. 13), the QQQ has delivered a fantastic total return of 120%. That translates to an annualized gain of 17.1%.
Looking ahead, it's anyone's guess how the Invesco QQQ Trust will perform, but there are reasons to be optimistic. The combination of passive investment flows into large-cap stocks, the dominance of select tech companies, and ongoing currency debasement could help propel this ETF higher.
Avoid the Ark Innovation ETF
By contrast, I think investors would be better off avoiding the Ark Innovation ETF (ARKK -3.02%). This actively managed fund is the largest of the ETFs created by Ark Invest, the asset management firm founded and led by Cathie Wood. Its portfolio holds "securities of companies that are relevant to the Fund's investment theme of disruptive innovation."
Wood and Ark Invest get a lot of attention thanks to their bold predictions. But those forecasts don't always pan out. Over the past five years, the Ark Innovation ETF has produced a total return of negative 7%. That's obviously a disappointing track record. And investors in that underperforming fund must pay a hefty expense ratio of 0.75%, nearly four times the cost of the Invesco QQQ Trust.
To be fair, though, this ETF has climbed 79% just in the past year. It's certainly having a moment in the spotlight. However, these kinds of gains aren't likely sustainable. They are a reflection of the fact that the Ark Innovation ETF invests in less-proven and earlier-stage businesses, which makes it much more volatile than a large-cap index fund.
It would be an unwise move for investors to shy away from investing in the technology trends that will continue to shape our economy. But to properly position their portfolios to benefit from those trends over the long term, I believe they'd be better off putting money into the Invesco QQQ Trust and staying away from the Ark Innovation ETF.
