ETFs to Consider as Microsoft’s Stock Drops Despite Strong Q1 Earnings

October 31, 2025

Microsoft’s (MSFT) stock dropped by 2.9% yesterday, despite the company surpassing analysts’ expectations with its first-quarter fiscal 2026 earnings and revenue. This decrease seems to stem from the announcement that capital expenditures are projected to rise in fiscal 2026, diverging from earlier forecasts of a slowdown in spending growth.

For ETF investors, this drop offers a potentially valuable chance to explore funds that have considerable Microsoft exposure. The anticipated increase in capital spending reflects Microsoft’s ongoing commitment to innovation and long-term growth, making related ETFs appealing for those wanting to capitalize on the tech sector’s evolution and AI advancement.

Funds like the iShares Dow Jones US Technology ETF (IYW), iShares Top 20 US Stock ETF (TOPT), Sector Select SPDR Technology ETF (XLK), Vanguard Information Technology ETF (VGT), and Fidelity MSCI Information Technology Index ETF (FTEC) spread risk while providing diversified exposure to Microsoft’s growth and other leading tech firms.

Before delving into these ETFs, let’s examine Microsoft’s Q1 performance through some other lenses.

In the fiscal first quarter, Microsoft’s adjusted earnings per share (EPS) exceeded the Zacks Consensus Estimate by 13.2%, and revenue was 3.6% above expectations. When compared to last year’s figures, EPS rose by 25.2% and revenue by 18.4%.

The robust revenue growth was largely driven by heightened demand for cloud and AI products.

Segment-wise, revenue growth was impressive across the board. Productivity & Business Processes saw a 17% year-over-year increase, while the Intelligent Cloud segment grew by 28%. The More Personal Computing division also reported a 4% revenue growth.

At the end of the fiscal first quarter, Microsoft held $102.01 billion in cash and short-term investments, up from $94.56 billion on June 30, 2025. In this quarter alone, the company returned $10.7 billion to shareholders via dividends and stock buybacks.

Looking ahead, Microsoft is keen to strengthen its strategic partnership with OpenAI Global, LLC, the parent company of ChatGPT. Since 2019, they’ve collaborated in various capacities. Recently, on October 28, 2025, Microsoft finalized an agreement that enables OpenAI to acquire an additional $250 billion worth of Azure services, presenting Microsoft with substantial future revenue opportunities.

For the second quarter of 2026, Microsoft anticipates revenue between $79.5 billion and $80.6 billion, projecting a growth of 14% to 16%. In terms of Azure, the company expects around 37% revenue growth, with demand surpassing supply. They predict that capacity challenges will continue until at least the end of fiscal 2025.

iShares Dow Jones US Technology ETF (IYW)

This fund boasts net assets of $22.4 billion and includes 140 U.S. electronics, software, and tech companies, with Microsoft holding the second-largest stake at 14.33%.

IYW has experienced a 30.5% rise since the year’s start. The fee for the fund is 38 basis points, and it sees an average trading volume of about 902,454 shares per day. It has a Zacks ETF Rank of #2 (Buy).

iShares Top 20 US Stock ETF (TOPT)

With net assets of $424.6 million, this fund provides exposure to the top 20 U.S. companies based on market capitalization within the S&P 500, where Microsoft ranks second with 13.72% of the fund.

TOPT has grown by 21.1% since the beginning of the year and charges a fee of 20 basis points, with an average daily trading volume of 598,588 shares. It has a Zacks ETF Rank of #2.

Sector Select SPDR Technology ETF (XLK)

This fund manages $97.04 billion in assets and covers 68 companies across various tech sectors, including hardware, software, and IT services. Microsoft holds a 12.19% share of this fund.

XLK has increased by 29.8% year-to-date, with a fee of 8 basis points and a trading volume of 1.96 million shares yesterday. It has a strong Zacks ETF Rank of #1 (Strong Buy).

Vanguard Information Technology ETF (VGT)

Valued at $128.3 billion in net assets, this fund provides access to 314 technology companies, including hardware and software. Microsoft ranks third with a stake of 13.09% in this fund.

VGT has seen a 27.6% increase this year, charges 9 basis points in fees, and has an average daily volume of 598,588 shares. The fund is rated with a Zacks ETF Rank #2.

Fidelity MSCI Information Technology Index ETF (FTEC)

With net assets of $16.15 billion, this fund allocates to 289 IT companies in the U.S. stock market, placing Microsoft third at 13.09% of the fund.

FTEC has also risen by 27.6% this year and charges an 8 basis point fee. This fund holds a Zacks ETF Rank of #1.

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