Major U.S. indices are coming off a strong performance quarter following surging gains of large-cap technology stocks fueling the bull market. Despite the slight drawback in recent weeks, Wall Street analysts are positive that there’s still enough steam left in the engines before indices could experience a retraction.
Tech Holding Steady
On Monday, May 20 indices across the market were pursuing new records as the tech-heavy Nasdaq gained 0.65%, reaching an intra-day record high of 16,794.87. The broader S&P 500 furthered its winning streak, gaining 0.09% and ending the trading day at 5,309.13.
On Wall Street, all eyes were on the Dow Jones Industrial Average which had caught investors off guard following its breakout performance on Friday, May 17. The Dow ended the trading day above 40,000, a new record for the 30-stock index and the first time in its nearly 128-year history.
After the weekend, however, the Dow Jones slightly retreated, falling 196.82 points on May 20, and closing off at 39,806.77.
Though retraction levels are somewhat superficial at this time, investors are hot on the heels of large-cap technology stocks and companies that are expected to begin delivering earnings results in the following weeks.
The next couple of weeks are set to be yet another eventful time on the stock market as major players such as AI chipmaker, Nvidia (NASDAQ: NVDA) are expected to deliver earnings. Company stocks gained 2% on May 20, as investors and analysts raised their pricing positions ahead of its earnings report.
Nvidia continues to push beyond the glass ceiling, with stocks up more than 96% since the turn of the year and already gaining more than 206% in the last 12 months. The tech and chip titan is now the third-largest on the S&P 500 with a market capitalization of $2.3 trillion.
Though elsewhere, broader economic performance continues to remain volatile despite U.S. inflation trending downwards and domestic demand for products and services cools. Inflation data showed that the consumer price index rose 0.3% in April with CPI rising 3.4% year on year, Reuters reported.
Sticky inflation and wage growth have left the Federal Reserve’s decision unchanged about cutting interest rates any time soon, with the federal fund rate still sitting at 5.25% to 5.5%. A potential rate cut is expected near the end of summer, as the central bank continues to gauge inflation, employment, and wage growth as key decision-makers before losing their monetary policy.
New York Wall Street sign.
Looking Towards Diversifying
The overactive market conditions are bringing new and old investors to consider other possibilities that could provide them with broader diversification in the tech sector. As the competition among large-cap companies continues to swell, those looking to hold a safer position could instead be looking at tech exchange-traded funds (ETFs) as an opportunity to gain market share and further diversify their holdings.
Broad tech ETFs are a corner of the market that has received major attention in recent years, with holdings in companies that are directly involved in the technology industry, including networking, software, hardware, semiconductors, social media, search engine marketing, and the Internet of Things (IoT).
Here’s a breakdown of five broad tech ETFs to keep on your radar this year.
Defiance Next Gen Connectivity ETF
5G connectivity is taking off at full speed despite being only in the beginning stages of its lifecycle. An Ericsson Mobility Report found that more than 1.6 billion 5G smartphone subscriptions were active by the end of 2023 with a projected two billion to be active by the end of this year.
The exceptional growth of the market has meant that mobile service providers are quickly catching wind of these developments and looking to leverage larger market opportunities in the coming years.
Defiance Next Gen Connectivity ETF (FIVG) shows that 5G technology and connectivity aren’t only essential for everyday communication but instead provide a stable investment opportunity for investors looking to expand their portfolios into this seemingly untapped market.
The fund has roughly 53 holdings, offering investors transparent exposure to 5G stocks and companies engaged in connectivity services, development, research, and commercialization. The underlying index tracks 48 globally-listed stocks with various market capitalizations.
Since its inception in 2019, the fund has held steady, offering a 21.68% one-year return, and roughly 9.15% since inception. Total return (NAV) is slightly in line with broader market performance, with year-to-date returns of 2.77%, as of May 2024.
A diverse fund holding ensures that investors obtain the necessary exposure to large-cap technology and network stocks, with iPhone maker, Apple (NASDAQ: AAPL) having the top spot, with 5.67% of the fund invested in Apple shares.
Other notable holdings include Nvidia (NASDAQ: NVDA), Broadcom (NASDAQ: AVGO), Qualcomm (NASDAQ: QCOM), Oracle (NYSE: ORCL), Advanced Micro Devices (NASDAQ: AMD) and Cisco Systems (NASDAQ: CSCO).
The Defiance Next Gen Connectivity ETF is more than a fund directed at network mobility. Instead, Defiance claims that this fund allows investors to gain traction in a rapidly growing industry that’s connected to more than mobile devices, but instead sees some of its biggest customers being in healthcare, finance, and data generation.
iShares Expanded Tech Sector ETF
The iShares Expanded Tech Sector ETF (IGM) is a broad technology fund with roughly 278 holdings in North American equities. The objective of the fund is to provide investors with more diversified exposure to North American equities and companies operating in the technology sector, including communication services and the consumer discretionary sector.
On top of this, the fund manages several holdings related to hardware, software, internet marketing, and interactive media. Overall, the Expanded Tech Sector ETF aims to provide North American and international investors with an expressed view of advanced technology companies and the broader tech sector.
Based on current performance data, the iShares Extended Tech Sector ETF has gained roughly 10.59 since its inception back in 2001. One year total return is currently standing at 52.97%, which for some investors might seem outlandish considering the fund’s broad exposure to various capital sectors.
The staggering performance of the fund can be largely attributed to its ability to invest in a large quantity of diverse tech and software companies. At the top of the list, companies such as Apple, Nvidia, Microsoft (NASDAQ: MSFT), Meta Platforms (NASDAQ: META), and Google (NASDAQ: GOOG) make up the largest portion of fund distributions.
Outside of investing in major tech companies, most of which are part of the Magnificent Seven, the fund has much of its distributions held up in the semiconductor and interactive media services, investing 24.0% and 19.31% of the fund, respectively. Other sectors of importance include application and system software, and lesser-known services such as IT consulting and communication equipment.
Since the turn of the year, the fund has gained 17.73%, while the broader S&P 500 has risen 11.29% YTD, and the S&P 500 Information Technology index is up by 16.24% YTD.
Roundhill Magnificent Seven ETF
Another suitable option for investors looking to invest in large-cap high-tech companies is the Roundhill Magnificent Seven ETF (MAGS) which invests in the top 7 tech stocks and provides investors with more exposure to heavy-weight competitors.
For investors that are not yet aware, the Magnificent Seven is the collective name given to the largest, and most prominent tech companies and includes Apple, Amazon (NASDAQ: AMZN), Alphabet (Google), Meta Platforms, Microsoft, Nvidia, and Tesla (NASDAQ: TSLA).
In the last couple of years, these seven trailblazing companies have helped push technology stocks to new heights, and the widespread development of artificial intelligence (AI) is helping to fuel the next generation of tech and software developers.
MAGS offers investors pure exposure to the Magnificent Seven companies, reducing direct volatile risk exposure and weighting out portfolio distribution. On average, distribution holdings are fairly equal, although currently 16.36% is invested in Alphabet Class A shares, with Meta Platforms taking the bottom position with 12.61% fund allocation.
Though the fund offers direct pure exposure to mega-cap tech stocks, seasoned professionals might be skeptical about the long-term viability of MAGS. For starters, the fund is relatively new, coming onto the market in November 2023, meaning that many investors still have limited amounts of data to clearly define their forward-looking position of the fund.
Secondly, the fund solely holds seven stocks, meaning that risk distribution to return potential is seemingly higher, and can be considered a drawback for older, more seasoned investors that are looking to lower these risks and direct capital towards more buoyant long-term options.
Finally, a principal investment strategy of MAGS is to invest at least 80% of its assets, including borrowings for investment purposes in the financial instruments of its holdings that provide the best exposure, or a combination of economic characteristics.
This could mean that should one of its holdings, or several others experience a significant decline in revenue, profit, market share, or market capitalization, the fund could then possibly experience declined near-term returns.
Though it’s an ambitious technology fund that gives the best possible exposure to the Magnificent Seven, perhaps investors who are looking to reduce risks and mitigate near-term volatility would be best suited to opt for something more geared towards their forward-looking goals.
VanEck Robotics ETF
On paper, the VanECK Robotics ETF (IBOT) offers a multi-dynamic investment opportunity that sees the fund invest in large-scale technological projects and developments supported by global market demand.
IBOT exposure is directed toward high-growth companies, the majority focusing on future industrial automation and technological acceleration. Based on current data, IBOT invests the majority of its capital in the information technology sector, followed by industrial and consumer discretionary. Other, smaller holdings are focused on healthcare, energy, and cash.
The fund aims to replicate the performance of the BlueState Robotics Index which tracks companies that are closely involved in the field of robotics research and development.
Overall, the BlueStar Robotics Index has held steady performance, with the index rising 23.45% over the past 12 months. The BlueStar Robotics Index has distributions across the world, investing in highly developed and high-growth capital markets, including the U.S., Japan, Switzerland, Germany, the Netherlands, and France, among other countries.
Since its inception back in April 2023, the VanEck robotics fund has gained roughly 21.39%, slightly below the 22.16% return reported by the BlueStar Robotics Index during the same period. However, a yearly return is currently reported at 22.17%, which could give a positive indication for investors looking to actively leverage the robotics industry.
In a report by the International Federation of Robotics, recent data showed that in 2023, manufacturing companies across the world, and primarily in the U.S. have heavily invested in production line and supply chain automation. During the period, robotic installations rose by 12%, reaching more than 44,300 units in 2023, with the automotive industry being the top adopter of automation and robotic equipment.
On the back of surging growth and demand, IBOT could be the link investors need to tap into the marketing of automation and robotic equipment. With both the private and public sectors now plowing hundreds of millions of dollars into the world of robotics automation, IBOT could perhaps be the turning point for novice and seasoned investors.
Vanguard Information Technology ETF
Last on the list is the Vanguard Information Technology ETF (VGT) which aims to track the performance of a benchmark index through passively managed strategies, including a full-replication strategy when possible.
As the name suggests, VGT is focused on investment movement within the information technology sector with 27.60% of its weighted exposure allocated to the semiconductor sector. The systems software sector follows second, making up 22.90% of the fund, and technology hardware, storage, and peripherals take up 17.30%.
Although these are only three of the primary sectors the fund is invested in, holdings such as Nvidia, Microsoft, Apple, Broadcom, Salesforce (NYSE: CRM), Adobe (NASDAQ: ADBE), Cisco Systems, and Accenture (NYSE: ACN) are among the 313 other companies that make up the broader diversification of VGT.
For the physical year-end 31 August 2023, Vanguard Information Technology ETF reported a strong turnover rate of 15.4%, while the fund currently has an earnings growth rate of 2.07%, according to recent fund information.
Other performance data indicates that VGT managed to slightly outperform the benchmark one-year performance rate. VGT reported a 12-month return of 29.70%, while the benchmark return was 29.66%.
For investors who are seeking more weighted security and direct exposure to the domestic information technology sector, VGT is considered a reasonably safer option for long-term opportunities and provides a seemingly secure holdings distribution.
Riding Out Uncertainty
As the bull run is expected to extend well into the coming months, looking toward the technology sector for better portfolio and performance buoyancy is becoming a sure strategic decision for investors and Wall Street investment firms.
Although uncertainty continues to loom overhead, with geopolitical tension and tight interest rates keeping some investors at bay, those seeking to leverage current market conditions are holding steady on technology stocks and ETFs due to a positive turnaround in the market.
Arguably, conditions are looking surprisingly positive for both ends of the spectrum. The S&P 500 Information Technology index is above the broader S&P 500, gaining 16.24% compared to 11.29% year to date. On a quarterly basis, similar conditions are playing out, as the S&P tech sector index gained 3.34% compared to 1.02% on the S&P.
Market conditions are piping hot, and investors aren’t taking a backseat anytime soon. Yet, broader economic conditions and the possibility of a hard landing remain deciding factors for some seasoned investors who are hoping to ride out near-term volatility.
Finishing Thoughts
Technology is rapidly changing the way we work and communicate, and the companies spearheading the race to innovation are casting a bright light on new opportunities on the stock market.
Though there is still a lot of uncertainty up ahead, both in relation to macroeconomic conditions and the global political environment, investors should consider seeking out investments, and diverse funds that not only provide stability but offer them the necessary long and near-term broad exposure in advanced tech sectors that can ride out uncertainty,m while providing sufficient portfolio buoyancy.
If you are looking for an AI stock that is more promising than NVIDIA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
Disclosure: I recently initiated a small position in Tesla, no other positions in any other positions mentioned.
