Through all of the market swings that have occurred in 2021 - investors favoring growth stocks before switching to cyclicals and back again - one idea has remained generally true throughout. Investors love their tech stocks!
No matter what the market cycle or what happens to be in favor at the moment, tech has continued to find a steady stream of buying interest. It helps that the FAAMG names - Facebook, Apple, Amazon, Microsoft and Alphabet - control about 25% of the S&P 500 and are constantly in the financial media (along with Tesla, of course). Tech actually lagged the broader market through the beginning of May before sentiment shifted again. Inflation began rising rapidly, the economy continued to slow and the Fed was effectively forced to begin considering an asset purchase taper and future rate increases. Ever since, the tech sector has outperformed and leads the S&P 500 by about 7% year-to-date.
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A few unsurprising groups within the sector have done very well this year. Blockchain and semiconductors have been the runaway leaders in 2021, returning 42% and 39%, respectively. Supply chain issues have been one of the driving catalysts behind the chip group as a huge supply/demand imbalance has driven up prices. That's been more than enough to steadily drive this group higher. Blockchain has taken advantage of the performances in bitcoin and ethereum as well as the ongoing migration to defi to produce huge gains again.
Outside of that, there were actually a number of underperforming themes in 2021, none more so than digital payments. American Express has had a solid year, but beyond that, all of the sector's biggest names - Square, Visa, Mastercard and Fiserv are all well in the red year-to-date. It's no coincidence that the online retail sector is also down around 20% this year as investors anticipate a slowing economy and tighter financial conditions.
Internet, robotics, artificial intelligence and cloud computing stocks are all up on the year, but only in the single digits, helping to emphasize how narrow this rally has actually been. And, of course, I'd be remiss not to mention that ARK ETFs and how much they've struggled this year.
Ranking The Technology ETFs
The variety of ETF choices makes distinguishing the best from the rest a little challenging. You've probably heard most financial pundits talk about focusing on funds with low expense ratios. That can certainly be a big factor in deciding which ETF to go with (it's probably the most important factor, in my view), but there are a lot of things that could go into making the right choice.
That's where I'm going to try to make things easier for you. Using a methodology that I've developed, which takes into account many of the factors that should be considered and weighting them according to their perceived level of importance, we can rank the universe of available ETFs in order to help identify the best of the best for your portfolio.
Now, this certainly won't be a perfect ranking. The data, of course, will be objective, but judging what's more important is very subjective. I'm simply going off of my years of experience in the ETF space in helping investors craft smart, cost-efficient portfolios.
Methodology And Factors For Ranking ETFs
Before we dive in, let's establish a few ground rules.
First, all of the data is used is coming from ETF Action. They have gone through the ETF universe to identify and categorize those ETFs used here. There are many that qualify and we'll be using their categorization as a starting point. Many thanks to them for opening up their vast database for my use.
Second, let's run down the factors I used in the ranking methodology.
- Expense Ratio - This is perhaps the most important factor since it's the one thing investors can control. If you choose a fund that charges 0.1% annually over a fund that charges 1%, you're automatically coming out ahead by 0.9% annually. You can't control what a fund returns, but you can control what you pay for the portfolio. Lower expense ratios equal more money in your pocket.
- Spreads - This relates to how cheaply you can buy and sell shares. Generally speaking, the larger the fund, the lower the spreads. Bigger funds usually have many buyers and sellers. Therefore, it's easier to find shares to transact and that makes them cheaper to trade. On the other hand, small funds tend to trade fewer shares and investors often need to pay a premium to buy and sell. Considering expense ratios and spreads together usually give you a better idea of the total cost of ownership.
- Diversification - Generally speaking, the broader a portfolio is, the better chance it has at reducing overall risk. A fund, such as the Energy Select Sector SPDR ETF (XLE), provides a good example. 45% of the fund's total assets go to just two stocks - ExxonMobil and Chevron. By buying XLE, you're putting a lot of faith in just those two companies. An equal-weighted fund, such as the Invesco S&P 500 Equal Weight Energy ETF (RYE), would score higher on diversification than XLE.
- FactSet ETF Scores - FactSet calculates its own proprietary ETF ranking for efficiency, tradeability and fit. They basically are designed to tell us if an ETF is doing what it sets out to do. I'm not going to copy and paste that work that they're doing, but there is some influence there to make sure my rankings are on the right path.
There are a few other minor factors thrown into the mix, but these are the main factors considered.
One thing that is not considered is historical returns. Most ETFs are passively-managed and are simply trying to track an index, not outperform. ETFs shouldn't be penalized for low returns simply because the index they're tracking is out of favor at the moment.
I'm ranking ETFs based on more basic structural factors. Are they cheap to own? Are they liquid? Do they minimize trading costs? Do they maintain risk-reducing diversification benefits?
Being in the bottom half of the list doesn't automatically make a fund "bad". It simply means that due to a low asset base, a high expense ratio, a concentrated portfolio or some other factor, it poses additional costs or downside risks.
Top Technology ETF Rankings For 2022
As is usually the case in these rankings, the ultra-cheap cream tends to rise to the top. You might be expecting to see one of the two heavyweights in this category - the Vanguard Information Technology ETF (VGT) or the Technology Select Sector SPDR ETF (XLK) - take the #1 spot, but instead it's the Fidelity MSCI Information Technology Index ETF (FTEC) that sits atop these rankings.
While Fidelity was a little late to the ETF party, it's made great strides by offering a diverse lineup of ultra-cheap beta, sector and dividend ETFs. FTEC is not only the biggest ETF in the Fidelity lineup, it's also the cheapest in the tech ETF space, a quality that helped push it above the other two big names in these rankings. All three scored highly in just about every category across the board - expense ratios, trading costs, diversification, liquidity, tradeability - and the margin between the three is razor thin.
Semiconductor ETFs take three spots in the top 10 - the VanEck Semiconductor ETF (SMH) at #6, the SPDR S&P Semiconductor ETF (XSD) at #8 and the iShares Semiconductor ETF (SOXX) at #9. Semiconductor ETFs, in general, have taken in big money this year thanks to stellar returns. That's helped them push a few spots higher on this list compared to last year as trading costs have come down slightly. The next semiconductor ETF on the list is the Invesco Dynamic Semiconductors ETF (PSI) at #19, so there's some clear separation by the top 3 names here.
Defiance is a comparatively little known name in the ETF space - about $1.7 billion in assets across 8 different ETFs - but size hasn't prevented the issuer from landing its two big disruptive tech ETFs, the Defiance Next Gen Connectivity ETF (FIVG) and the Defiance Quantum ETF (QTUM), in the top 12. FIVG should be fairly self-explanatory in the theme it's targeting, but QTUM is its offering that focuses on AI and machine learning. The below average expense ratio of FIVG clearly helped push it up this list, but QTUM's position at #12 surprised me a bit.
If you're looking for the first ARK ETF on this list, you'll need to start outside the top 20. The ARK Fintech Innovation ETF (ARKF) lands at #22 and the ARK Next Generation Internet ETF (ARKW) comes in at #26 (the ARK Innovation ETF (ARKK) is categorized as a multi-theme fund, not a tech fund, so it doesn't show up in these rankings). Asset size and tradeability aren't concerns with the ARK ETFs, but the relatively high expense ratios that come with actively-managed funds certainly worked against them.
The next 30 names in the rankings include a mix of popular names and up & comers.
Perhaps the most popular fund of the second tier, the Amplify Transformational Data Sharing ETF (BLOK), is the highest ranking blockchain ETF on the list, something I'd certainly concur with on a structural basis as well as on this list. I'd argue that active management is essential when investing in blockchain. BLOK offers that at almost no cost premium, making it the best choice for blockchain exposure in my opinion.
The ProShares S&P Technology Dividend Aristocrats ETF (TDV) is one of the few dividend-focused funds on this list (the First Trust Nasdaq Technology Dividend Index ETF (TDIV) showed up earlier at #15). From a pure performance standpoint, dividend payers have been a consistent laggard this year and both TDV and TDIV followed suit, despite their tech exposure.
There are a lot of thematic tech ETFs on the rest of this list. The Global X Cybersecurity ETF (BUG) might be the best of the bunch in this group based on cost and exposure. The Direxion Work From Home ETF (WFH) was the big "it" ETF when the pandemic first shuttered many businesses, but has largely drifted to the background since. The ETFMG Prime Mobile Payments ETF (IPAY) is the largest fund you'll find this far down the list at #48. Again, performance isn't a factor, but it's been one of the worst-performing ETFs this year.
This is the spot where you find most of the tinier ETFs. Among those I find interesting:
The ProShares Nanotechnology ETF (TINY) and the Direxion Nanotechnology ETF (TYNE) - both of which are brand new funds competing in a space that has little coverage. The Bitwise Crypto Industry Innovators ETF (BITQ) comes from a company that has long studied the crypto space and is perhaps best suited to manage a crypto/blockchain product. The Viridi Cleaner Energy Crypto Mining & Semiconductor ETF (RIGZ) is a bit of a unicorn focused on not just crypto development but also layering on an ESG screen to focus on clean energy miners.