Over the past decade coming out of the financial crisis, the tech sector has been the unquestioned leader in driving the equity markets higher. While there have been bumps along the road, tech stocks, mega-cap names in particular, have consistently been the favorites among many investors.
Tech ETFs have also enjoyed similar interest. Broadly focused tech funds work well for those who simply want to overweight the sector in their portfolios, but the emergence of ETFs targeting specific sectors and themes, including semiconductors, artificial intelligence, fintech, cloud computing and cybersecurity, have made it easy for investors to narrow their focus in many different ways.
This segment of the ETF marketplace has grown to nearly 70 different non-leveraged offerings and that can present some challenges in determining which one you might choose. While comparing styles and returns is difficult because the stocks these ETFs target can result in a very apples-to-oranges comparison, there are a few common factors inherent in all ETFs that are worth examining that can lift some funds above others.
That's where this list is designed to come in handy. Expense ratios, trading costs and diversification are among the factors that can be looked at to help determine which ETFs give you the best chance at maximizing your returns and helping to minimize certain risks.
Now, this certainly won't be a perfect ranking. What rates as more important than another is subject to personal preference, but I'll be 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 Dividend 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 those ETFs focused on this segment in some way. There are dozens of funds 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% every year. 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 the 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 minor other factors thrown into the mix, but these are the main factors considered.
One thing that's not considered are 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.
Technology ETF Rankings
Since expense ratios are a significant factor in these rankings, it's not at all surprising to see the three ETFs which are easily the cheapest in this space taking the top 3 spots.
It may be a surprise to see the relatively smaller Fidelity MSCI Information Technology ETF (FTEC) sitting atop these rankings over the mammoth Vanguard Information Technology ETF (VGT) and the Technology Select Sector SPDR ETF (XLK), but it shouldn't be. Fidelity is a late entrant to the ETF game, but its decision to compete on price has attracted a sizable asset base. That's made it both cheap and very liquid. It's only average in terms of diversification - Apple and Microsoft account for 36% of the portfolio - but it rates as highly efficient overall. It was a narrow victory for FTEC, but the top 3 are clearly a step above the rest in this space.
The rest of the top 10 is littered with sector focused ETFs, the majority being in semiconductors. The Defiance Next Gen Connectivity ETF (FIVG) is an interesting addition at #9 making it easily the smallest issuer to crack the top 10. The iShares Evolved U.S. Technology ETF (IETC) is the 4th cheapest ETF on this list, but its small size prevents it from moving higher up this list.
Here we get our first taste of the ARK ETFs. Since these ETF rankings give greater weight to more inexpensive funds, the 0.75% and 0.79% expense ratios don't play well here despite a superb long-term track record.
There are a lot of themed ETFs in the middle portion of these rankings, including cybersecurity, cloud computing and fintech. The Amplify Transformational Data Sharing ETF (BLOK) is the first and largest blockchain ETF on the list. The ProShares S&P Technology Dividend Aristocrats ETF (TDV) is a unique strategy, but could eventually become interesting given its combo focus on both tech and dividends. There's not much in the way of yield pretty much anywhere on this list, so the income aspect may not be enough of a differentiator.
The bottom half of the list features many of the smaller funds, which should be too surprising since they tend to be more costly to trade and their expense ratios are generally higher. Finding the iShares Expanded Tech-Software Sector ETF (IGV) and the iShares Expanded Tech Sector ETF (IGM) this far down the list is a little surprising given their size, but they rate only about average in terms of cost, diversification and efficiency.
The Direxion Work From Home ETF (WFH) was a high profile launch in response to the COVID pandemic, but it's so far only been met with middling interest.