Concentrations in a specific technology ETF might pose greater risks compared to others.
The tech sector has experienced quite the roller coaster this past year. The technology-focused Nasdaq Composite—a major index in the US stock market—fell by 20% from the start of the year until April 8. However, since that low point, it has rebounded by over 37% as of early August.
Despite this volatility, the tech sector seems to promise significant long-term rewards. If you’re looking to add some tech assets to your portfolio, it might be wise to consider a tech-focused exchange-traded fund (ETF). This approach can leverage the industry’s growth potential while minimizing the risks tied to investing in individual companies.
There are numerous tech ETFs available, but there’s one I’m currently favorable towards and another that I’m choosing to avoid.
Tech ETF I’m Considering
The ETF that has caught my attention is the Invesco QQQ Trust (QQQ), which is the second most traded ETF in the US. It tracks the NASDAQ-100, a subset of the Nasdaq Composite.
While the NASDAQ Composite captures almost all trades on the NASDAQ Stock Exchange, the NASDAQ-100 focuses on the top 100 non-financial companies within that index. Over 60% of QQQ is concentrated in the tech sector.
Since its launch in March 1999, QQQ has consistently outperformed the market. Its price has risen nearly 1,000%, compared to around 390% for the S&P 500. Over the last decade, it has averaged an annual return of 17.5%, while the S&P 500’s average was about 11.6%.
Maintaining that 17.5% average might be a challenge, but QQQ has the potential to continue outperforming the market in the long run. In the last 20 years, it outperformed the S&P 500 in 14 of those years. The exceptions were in 2005, 2006, 2008, 2016, 2021, and 2022.
Tech ETF I’m Avoiding
On the other hand, I’m steering clear of the Vanguard Information Technology ETF (VGT). While it’s a large ETF with significant assets under management, its recent adjustments have introduced more risk than I’m comfortable with.
VGT is broader and encompasses US technology companies across various sizes. My main concern with VGT is its heavy concentration in three stocks: Nvidia, Microsoft, and Apple. Although these companies are also part of QQQ, their weighting in VGT is noticeably larger.
| Company | VGT Percentage | QQQ Percentage |
|---|---|---|
| Nvidia | 16.74% | 9.99% |
| Microsoft | 14.89% | 9.18% |
| Apple | 13.03% | 7.13% |
With over 44% of the ETF’s holdings resting on just three stocks, it doesn’t align well with a diversification strategy. Admittedly, having 26% of the 100 stocks in QQQ coming from those three also isn’t ideal, but there’s a significant difference in weight between the two ETFs.
Furthermore, QQQ includes major tech players like Amazon, Meta Platforms, and Alphabet—companies that are notably absent from VGT. If I’m investing in ETFs for tech exposure, these are the types of companies I want in the mix.
One Area Where VGT Excels
Even though I prefer QQQ, one aspect where VGT shines is its lower expense ratio. Currently, QQQ has an expense ratio of 0.20%, whereas VGT’s is only 0.09%. Though this difference may seem minor, it can impact overall returns if both ETFs yield similar performance.
Nevertheless, I’m leaning towards QQQ mainly because I already have a substantial investment in large-cap tech and I’d like to reduce my reliance on Nvidia, Microsoft, and Apple.
