1 Top Technology ETF to Buy and 1 to Avoid

The technology-oriented Nasdaq 100 index is back into correction territory, down 10.5% after hitting an all-time high last month. The tech sector has been the driving force for the stock market’s gains during the latest bull run, though much of the gains have been concentrated in a handful of stocks.

Two years ago, the Magnificent Seven held sway over the market, and many of those same names still account for a good percentage of the Nasdaq 100’s run-up.

Yet you can achieve a bit more sector diversity by buying an exchange-traded fund (ETF) that focuses on the sector. Although the biggest players will still likely represent the largest percentage of the portfolio, you can drill deeper into the tech market with a targeted ETF.

Not all are created the same, so below you will find on of the best tech ETFs to buy and one to sell.

Vanguard Information Technology ETF (VGT)

The Vanguard Information Technology ETF (NYSEARCA:VGT) is one of the best tech ETFs for your portfolio, if for no other reason that the Vanguard family’s renown low expense ratios that allow more of your money to work for you than line the money manager’s pockets. For a passive fund like VGT, which charges just 0.09% — significantly lower than the in average 0.93% for similar ETFs — it doesn’t take much other than following its benchmark, the MSCI US Investable Market Information Technology 25/50 Index.

The Vanguard ETF holds over 300 technology companies, though its three largest holdings are Apple (NASDAQ:AAPL), Nvidia (NASDAQ:NVDA), and Microsoft (NASDAQ:MSFT) that account for 46% of the portfolio. However, no one stock can account for more than 25% of the total, and the sum of the stocks with weights above 5% cannot exceed 50% of the index, so you’re not likely to see their weight increase.

Since inception in 2004, VGT has delivered 12.8% annualized returns, outpacing the S&P 500’s 10.2%, thanks to tech’s relentless march higher. Although its 0.58% yield lags income ETFs, its is more than offset by its growth. The ETF’s diversified tech exposure, owning stocks in software, semiconductors, and hardware ensures its long-term resilience, though obviously risks abound. 

The tech sector’s volatility and tariffs on trading partners, especially in China represent a headwind, but technology is only growing more central to the U.S. economy, underscoring the extended runway VGT has for future growth and expansion.

Ark Innovation ETF (ARKK)

Cathie Wood’s Ark Innovation ETF (NYSEARCA:ARKK) is a tech ETF to avoid. While it was one of the primary reasons the investing guru shot to fame and the stock market’ consciousness after ARKK quadrupled in value in 2020, it has significantly underperformed industry peers and the S&P 500 since.

Give her credit for not larding the ETF’s portfolio with the typical tech stocks — though Tesla (NASDAQ:TSLA) is the largest holding representing 11.4% of the portfolio — Wood makes big bets on broad themes for what he believes will be transformative innovations in the future. 

To an extent she is playing a long game as she likes to buy into companies before their niche has really taken hold, but Wood is also a very active trader, buying and selling stock on a daily basis. Again, to her credit she is very transparent and publishes all of her trades every day, but it’s a more chaotic experience and her expense ratio of 0.75% is close to the industry average.

As noted, ARKK’s portfolio is not the typical run-of-the-mill tech sector. Tesla is an automaker, though obviously very tech forward, but you can also find among her top 10 holdings healthcare stocks like CRISPR Therapeutics (NASDAQ:CRSP), Tempus AI (NASDAQ:TEM), and Twist Bioscience (NASDAQ:TWST). You’ll also find financial services stock Robinhood Markets (NASDAQ:HOOD).

All of these companies do have a tech component to them — genomics, artificial intelligence, etc. — but it makes for a much more volatile environment that bursts higher when an industry becomes hot, but can crash quickly as investors move onto other themes.

The portfolio is also much more concentrated than Vanguard or many other tech ETFs with just 32 stocks in the portfolio, which increases its volatility. While Wood may outperform VGT or the S&P over time, it will be a white-knuckle ride and is worth just sitting it out.

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