Tech ETF: Investing in the whole sector easily.
Have you ever wondered how you could get into the tech market but did not have the capital to buy thousands of shares of Microsfot, Netflix, Intel, Apple and more?
Tech ETF’s! There are so many technology based ETF’s that trade on the secondary market, and investor or trader can get access to a whole basket of tech stocks without selling their liver!
Throughout this article, we’ll be focusing on the XLK ETF with notable mentions of the VTG, IYW and even the QQQ.
Tech ETF: Basics
The Technology Select Sector SPDR ETF (XLK) is a benchmark tech ETF that represents tech and telecommunications sectors in the S&P 500.
The XLK ETF represents 69 securities. The basis of the ETF is that it resemblances to a predetermined weight each quarter, making it a modified market-cap weighted index.
The top ten asset holdings represent nearly 65% of the ETF. With Microsoft leading the way, the following table represents the top 10 holdings per weight on the XLK.
|Company||1-yr Returns||% of Net Assets|
XLK is the largest US-traded tech-based ETF with $17,751M in total assets. Along with a year to date return of 4.95%. The XLK ETF has a fund expense ratio of 0.13%. Which is relatively cheap for a tech-based ETF.
The ETF trades like a stock on the NYSE and is robust when tech stocks outperform.
Tech ETF: Trading.
Trading ETF’s is like trading stock and the XLK ETF is no different. XLK closed at $65.05 on January 28th. The interesting, yet not surprising fact is that the XLK’s price action reflects that of the S&P 500. Of course there are some discrepancies. Just take a look at the chart below, the red line graph represents the S&P 500 Index, and the candle stick chart is the XLK.
Since the stocks in the S&P 500 are reflected in the XLK, the correlation is to be expected. Since the ETF trades like a stock, you can purchase shares of XLK in order to get exposure of a basket of tech stocks that represent the tech sector.
Another way to trade the XLK is options. The ETF is optionable and one could buy calls and puts even sell options to generate income on the ETF.
Options provide higher leverage than owning the ETF itself, which could be a double-edged sword. However, for those who do not want to spend $65.05 per share of XLK and want to rejoice in the upside, call options are the way to go!
Tech ETF: XLK vs the rest.
XLK represents a specific basked of tech and telecommunications stocks, meaning its not a fully accurate representation of the tech sector. There are certain securities missing such as Amazon and Google that make up a large portion of the tech industry.
However, there are other tech-based ETF’s that contain the previously mentioned tech giants.
So how does the XLK compare to the Nasdaq ETF (QQQ), Vanguard IT ETF (VGT) and the iShares US tech ETF (IYW)?
First things first, each ETF has a different composition, but still represents the tech sector in a generalized basket.
QQQ holds the most complete basket of tech stocks, including MSFT, AMZN, AAPL, GOOGL, FB
IYW holds 152 assets, with a heavy focus on MSFT and AAPL as does XLK. As does VGT with 321 holdings. Some might argue that VGT is the most diverse ETF out of the lot, but it lacks a lot of important assets that QQQ holds.
In terms of size, QQQ leads the way, holding $63,139M in assets under management. Next is XLK with $17,751M and VGT with $17,161M. IYW pales in comparison with under $4,000M AUM.
There are three more critical points on comparison traders should take into consideration and they are each ETF’s expense ratio, average volume traded and their current price.
The table below compares all of the expense ratios for the tech ETF’s listed:
|Tech ETF||Expense Ratio|
Average volume traded
The average volume traded on a monthly basis is listed below for each ETF. QQQ has the most volume traded, making it the most liquid asset, it substantially outweighs the others. XLK is second with a substantial amount, but still more than 3.5 times less than QQQ.
|Tech ETF||Average 1-Month Vol. Traded|
XLK is the cheapest out of the four that we have outlined. Price of each ETF is correlated. However some move in a more volatile way than the rest. VGT and IYW tend to have large moves to either side.
|Tech ETF||Closing Price Jan 28th|
After having gone through an extensive list of criteria, you may be asking, which ETF is right for me?
You’ve got to think about which criteria is most important for you. Based on liquidity and diversity of the sector as a whole, QQQ is the ETF for you.
If you are looking for liquidity, overall reflection of a sector through sampling and a cheaper price, then XLK is right for you.
VGT and IYW have different and diverse holdings, but for the price they trade at, their liquidity is not the greatest.
In retrospect, the choice should be between XLK and QQQ.
The information contained in this post is solely for educational purposes, and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable to your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.