The S&P 500 is up nearly 7% year to date, according to data provided by CNN. At the same time, tech stocks remain one of the hottest portions of the market, even as CNBC reports that the S&P 500 will undergo a significant structural change that may relocate popular tech companies to a new communications services sector later this year.
For the time being, tech-focused exchange-traded funds (ETFs) have been riding the highs of this powerful sector. The top tech ETFs have dramatically outperformed the S&P so far this year, with double-digit gains a hallmark of the space. In this article, we'll explore two of the top tech ETFs based on year-to-date performance, as well as a newcomer that may take advantage of the communications services sector shift.
The Technology Select Sector SPDR Fund is one of the largest tech-centered ETFs. With close to $23 billion in assets under management (AUM), XLK sports an average daily volume of close to $900 million and an expense ratio of 0.13%. This ETF offers broad exposure to the U.S. technology area. It generally does not include small-cap or many mid-cap companies, helping it to reduce volatility, according to ETF.com. Considering that XLK is relatively cheap, sizable and highly liquid, as well its YTD performance of 15.09% as of this writing, XLK is a smart buy for any tech-focused ETF investor. (See also: A Different View on a Big Tech ETF.)
The Vanguard Information Technology ETF is "one of the most diverse market-cap-weighted technology ETFs available," per ETF.com. Unlike XLK, VGT includes small- and micro-cap stocks in its basket. Nonetheless, it still keeps all-in costs quite low for investors. At the same time, it enjoys high liquidity and close to $22 billion in AUM. VGT has returned 17.50% YTD as of this writing. (For more, see: Top ETFs Capitalizing on Artificial Intelligence.)
One of the newest ETFs exploring stocks in this area, the Communications Services Select Sector SPDR Fund was launched in June 2018 in response to the upcoming changes to the sector. XLC includes all the members of the former telecom sector, plus media and entertainment companies. This means that XLC's basket includes some highly popular "tech" names as well as stocks in related sectors. At this point, as a new ETF, XLC sports just under $350 million in AUM. It has dipped by about 2.70% since inception, but investors hope that this performance will turn around once the tech sector shift takes place. Nonetheless, XLC remains an ETF to watch in the months to come. (See also: Peering Into the New Communications Services Sector.)
Investors focused on the tech space should be aware that their ETF holdings, which usually require little effort thanks to the built-in diversity included in each fund's basket, may shift in the weeks and months to come. DataTrek Research co-founder Nicholas Colas believes that investors must be prepared to buy up big tech names like Facebook, Inc. (FB) and Alphabet Inc. (GOOG) separately. "If you own names like XLK and XLY, which are huge ETFs," he says, "...realize you're no longer going to own Facebook and Google in XLK. So, if you like those names, buy them separately because they're no longer part of your holdings."
Colas adds, according to CNBC, that "you'll see it's a lot more volatile than the old telecommunications sector, and that's really a warning sign to me. It's a very heavily concentrated group. I'd say use extreme caution in looking at it, at least very early on until you see how it trades. It's going to be very, very volatile out of the box." All of this is to say that, while tech ETFs have been massively successful so far this year, that's no reason for investors to get complacent. (For additional reading, check out: A Primer on Investing in the Tech Industry.)