Over the last decade, there's been no larger disruption in retail investing than the exchange-traded fund. According to Goldman partner Robert Boroujerdi, total ETF assets under management increased 24% per year during that time frame, growing from $230 billion to $2 trillion in the United States alone. This still trails the overall mutual fund market, which boasts an AUM figure of roughly $16 trillion, but the explosive growth of ETFs has been undeniable.
And that makes sense, given the many advantages ETFs have over their larger, older counterparts. Unlike mutual funds, ETFs are priced and traded continuously during the day, allowing investors more price transparency. Other benefits include tax efficiency and (generally) lower management and administration fees.
Of course, there are always trade-offs. For ETF investors, these lower fees and tax-efficient investments come at the expense of active management. Unlike mutual funds, which generally employ active-management strategies in some respect, ETFs are mostly passive, indexing vehicles, leaving investors to figure out which investment suits their strategy the best.
In the technology industry, where businesses are disrupted daily, there are more than a few ETF options. The question is: Which one is the top ETF in the market?
The answer: It depends. That said, there are a few tech ETFs that stand out from the crowd. Let's go over three of them.
Top tech ETF for large-cap technology exposure
When it comes to exposure to the technology industry, the most widely quoted index is the Nasdaq Composite, which contains more than 3,000 companies. And the index that tracks the 100 largest companies in the Nasdaq by market capitalization is the Nasdaq-100. For a low-cost way to gain exposure to the blue chips of the Nasdaq-100, investors should look into Invesco's PowerShares QQQ Trust (NASDAQ:QQQ).
Of course, this ETF is not for all investors. For investors who already have positions in large-cap technology companies, whether through direct company ownership or through other market-cap-based ETFs like the SPDR S&P 500 ETF Trust, this may not be the best choice. Because the Nasdaq-100 is weighted by market cap, large-cap companies have more influence on the index -- and therefore the PowerShares QQQ Trust -- than smaller ones. Overall, the PowerShares ETF has a 13% weighting in Apple alone, and when you add in other major tech holdings Microsoft, Amazon, Google (Class A and C shares), and Facebook, they account for 39% of the ETF altogether. If you hold a large-cap growth mutual fund, ETF, or any other large-cap index tracker, you may be less diversified than you think.
If only there were an alternative to this relatively undiversified ETF...
Top tech ETF to avoid concentration
Investors who are looking for exposure to these tech companies but are worried about being overweight in any single tech investment should look into First Trust Nasdaq-100 Equal Weighted ETF (NASDAQ:QQEW). This fund is one of a small group of ETFs that offer exposure to the Nasdaq 100 on an equal-weighted basis, which means they do not weight their holdings by market cap, but rather hold an equal percentage of each company in the index.
There are a few downsides to this investment, however. If you're an active trader -- something we don't encourage here at The Motley Fool -- the investment is less liquid in terms of average daily volume, which creates bid-ask spreads that are larger than those of more actively traded issues. Also, the expense ratio is three times larger than the aforementioned PowerShares ETF's (0.60% versus 0.20%), which reflects its smaller AUM base and higher rebalancing costs.
Finally, transitioning a market-cap index to an equally weighted ETF leads to an effect called the "bum curse," whereby companies that are growing their market cap (a good thing) are sold off to rebalance the ETF to purchase more of companies that are not growing their market cap. For those less who are concerned about diversification but focused on absolute return, this may not be the best investment.
Top tech ETF for technology income
Historically, technology hasn't been the favorite sector of dividend investors, as these companies have generally preferred to reinvest their earned capital, normally doing so at above-average rates of return, rather than return cash to investors. However, many are now paying above-average dividend yields. Not many ETFs have been created to give investors exposure to this phenomenon, but fortunately, the First Trust Nasdaq Technology Dividend ETF (NASDAQ:TDIV) offers investors a nearly 3% dividend yield from technology companies.
Like the other First Trust ETF, this tends to be a lower-AUM, relatively high-cost ETF (although its 0.50% expense ratio is still lower than that of the average equity mutual fund). Personally, I'd love to see more ETFs based upon dividend-paying tech companies. As for the investments, the group is dominated by what's typically known as "old tech" -- investments that are considered mature and slow-growing in their primary business. For example, the fund's top 10 holdings include Intel, Cisco, IBM, and Oracle.
If you're in the market for more technology exposure, check out the aforementioned investments to see if they fit your risk and return profile. More broadly, though, the proliferation of ETFs has given investors more choice, lower costs, easier diversification, better tax-management, and more transparent market pricing. This is one investment trend all retail investors should celebrate.