All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.
Investing in ETFs (exchange-traded funds) has proven time and time again to be one of the best strategies for both beginners and experienced investors. With technology stocks booming over the last few decades, investing in technology ETFs has also been a winning strategy for UK investors.
It removes the need to pick out the next Microsoft (MSFT), Alphabet (GOOGL), or Apple (AAPL) – because you can invest in funds that automatically hold the winners and drop the losers. But, investing in tech ETFs can add a layer of complexity to your research. So we’re going to look at the mechanics of this type of asset and break down all the moving parts so that you can more easily find the best tech ETFs on the market.
What are tech ETFs?
This is a type of exchange-traded fund (ETF) that specialises in technology stocks. Different types of tech ETFs exist, but all will be based on the technology sector (as the name suggests).
It’s worth remembering that the term “technology” can be used broadly, as many businesses use tech in one way or another. But, for the purpose of investing in tech ETFs, the underlying assets should fall within the 3 main groups that the Global Industry Classification Standard (GICS) uses to categorise tech stocks:
- Software and services.
- Technology hardware and equipment.
- Semiconductors and semiconductor equipment.
How technology ETFs work
This category of ETF works exactly the same as any other exchange-traded fund. Each tech ETF will be set up to contain a basket of securities. It may focus on a specific region, or cover a technology niche. By purchasing shares in a technology ETF, a portion of your investment will go to each company held in the fund.
The exact stocks held in a tech ETF will depend on whether the fund mirrors a particular index or if there is some kind of active management picking the shares. Most technology ETFs will be “market capitalisation weighted”. So, the bulk of your investment will go to the top holdings (based on market cap).
Here are some examples of the most popular types of technology ETFs that UK investors tend to look at when searching for the best tech investments:
- Passive index-tracking ETFs (e.g. Vanguard Information Technology ETF VGT)
- Actively managed ETFs (e.g. BlackRock Future Tech ETF BTEK)
- Region-specific tech ETFs (e.g. iShares S&P 500 Information Technology Sector UCITS ETF IITU)
- ETFs investing in a particular type of technology (e.g. VanEck Semiconductor UCITS ETF SMGB)
- Sustainable technology ETFs (e.g. iShares MSCI World Information Technology Sector ESG UCITS ETF WITS)
- Thematic ETFs (e.g. HAN-GINS Cloud Technology Equal Weight UCITS ETF SKYY)
Specialist technology ETFs
Many technology ETFs invest in a broad range of stocks from across the full spectrum of possibilities. Yet, there are also plenty of tech ETFs that focus on very specific areas or themes. These ETFs tend to take more research, and come with a higher-risk, higher-reward trade-off.
To give you an idea about some of the current possibilities, you can find technology ETFs that invest in sub-sectors such as:
- Cloud computing – Companies increasingly use the cloud (remote servers hosted on the internet) to store, manage, and process data. This gives them greater flexibility and control over their technology costs.
- Artificial intelligence (AI) – Has plenty of potential to automate time-consuming manual processes. Uses can involve anything from reading health-related scans to plotting efficient logistics routes.
- Internet and ecommerce – The pandemic has accelerated the adoption of online shopping, but the ecommerce trend was firmly in place even before people were forced to stay at home.
- Robotics – Lower development costs, evolving technology and rising cost of labour are encouraging companies to use automation and robotics across all sorts of businesses.
- Fintech – There has been an emergence of technology firms looking to disrupt the financial industry, sometimes bypassing mainstream banks altogether. Fintech ETFs focus on key financial technology companies such as Paypal or Square.
- Cybersecurity – Cybercrime has become a pressing problem for many companies. Hackers have grown more sophisticated and ambitious. So, firms are increasingly willing to spend money protecting their systems from attack, which has created a compelling environment for cybersecurity companies.
- Digital transformation – Digitisation has continued to build momentum as companies have recognised the commercial imperative of using technology to rethink existing business practices. In a slow-growth, competitive world, digitisation allows businesses to squeeze out stronger returns and improve productivity.
Best performing tech ETFs in the UK
If you want to check out the best-performing technology ETFs, take a look at the ETF options below. Just keep in mind that these aren’t necessarily the best tech ETFs to buy in the UK today. Past performance doesn’t dictate future results. The under-performers may do well over the next few years.
Table: sorted by 5-year performance based on data from JustETF.com
| Icon | Fund | 5-year performance | YTD performance (to April 2023) | Link to invest |
|---|---|---|---|---|
 | SPDR S&P US Technology Select Sector UCITS ETF (GXLK) | 163.59% | 16.48% | Invest with Hargreaves LansdownCapital at risk |
 | iShares S&P 500 Information Technology Sector UCITS ETF USD (Acc) (IITU) | 161.72% | 16.86% | Invest with FreetradeCapital at risk |
 | Invesco US Technology Sector UCITS ETF (XLKQ) | 158.69% | 15.35% | Invest with FreetradeCapital at risk |
 | Xtrackers MSCI USA Information Technology UCITS ETF 1D (XSTC) | 155.39% | 16.66% | Invest with SaxoCapital at risk |
| Xtrackers MSCI World Information Technology UCITS ETF 1C (XDWT) | 138.84% | 16.44% | Invest with IGCapital at risk |
How to invest in tech ETFs
Investing in technology ETFs can be extremely straightforward (and cheap in most cases). If you’re a UK investor and want to start putting money into the best tech ETFs, just follow this step-by-step guide:
- Research tech ETFs. It’s important to take some time to find the right technology ETF to invest in. Finding the best tech ETF for your individual investing goals will be a personal decision.
- Find a platform. Only some UK brokers will give you access to a wide range of tech ETFs. So, it’s worth checking to see which investing platform will let you invest in the particular technology ETF you want to buy.
- Fund your account. Once you’ve picked a fund that suits your investing strategy and found a suitable trading platform to buy your ETF, the next step is to deposit funds.
- Buy the tech ETF. With funds ready in your account, it’s time to buy your chosen technology ETF. The great thing about ETFs is that you get exposure to a basket of investments in one single transaction. This can save you a lot of money if your brokerage charges you a commission for buying shares.
Best trading platform for ETFs: IG
We chose the IG as our top pick because:
- Invest in over 13,000 shares, funds and investment trusts.
- Low costs – Zero commission on US shares, £3 on UK shares.
- Support available 24 hours a day from Sunday to Friday.
Need to know: If your account is inactive for more than 24 months, you will be charged a rolling fee for account inactivity.
Read our review of IG.
The risks of investing in technology ETFs
Like with any investment, there are always risks to consider. Tech ETFs are no different, and below are some of the key risks you need to think about before investing:
- Technology stocks tend to be more volatile, which can be reflected in the price movements of the fund.
- Higher interest rates make it more expensive for tech stocks to borrow money and fuel growth.
- Inflation can reduce the valuation of tech stocks.
- Because most tech ETFs are market-cap-weighted, you might miss out on the explosive growth of smaller companies.
- Tech ETFs should still be used as part of a balanced and diversified portfolio.
- There is sector risk to consider, and backing specific technologies can be even riskier.
- Some technology ETFs are more expensive than broad market ETFs.
Are tech ETFs worth it?
It depends on what you’re looking for. If you want to build a portfolio that contains some of the best technology stocks on the market, an ETF can be a great way to set up a tech portfolio with minimal legwork. You still need to do your research and make sure any tech ETF fits on your plate when it comes to risk appetite. But in most cases, it can be a safer route than picking a handful of individual tech stocks because you typically get more diversity with an ETF.
However, not all tech ETFs are cut from the same cloth. If you decide to invest in a heavily specialised technology ETF, you’re putting yourself at the mercy of that niche. If you concentrate on a small area of tech with an ETF, you could maximise your profits, but it could also lead to increased losses if you pick a sub-sector that becomes unprofitable.
Pros and cons of tech ETFs
- A simple and cheap way to build a technology portfolio.
- It can be lower risk than picking individual tech stocks.
- Potential for higher returns compared to other sectors.
- Technology stocks can be volatile.
- Some technology ETFs require more time to research.
- There is a risk of over-concentration if you only invest in tech companies.
Bottom line
Using technology ETFs can be an excellent way to build yourself a portfolio containing some of the best tech stocks on the market. Doing this will involve less time and effort than picking out individual shares. However, finding the best tech ETFs can still be difficult, and most will be a higher-risk investment than a more broadly diversified exchange-traded fund.
Investing in a tech ETF can reduce some risk by spreading your bets, but the opportunity cost is that your returns will likely be smaller than if you had successfully backed a few top tech firms. It’s all about finding balance and meeting your investing goals. If you do want a cheap and efficient way to invest in the current, and next-best technology stocks, then using an ETF is definitely a great place to start.
Compare platforms to buy ETFs
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All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.
FAQs
Do technology ETFs always make money?
Sadly, no. Like with any investment, there is a chance that you’d get out less than what you put in. Your timeframe will partly determine whether you make money or not. The longer you hold a technology ETF, the greater chance you’ll give yourself of making long-term returns.
Do tech ETFs pay dividends?
Some will. It’s always best to check the details of the technology ETF, ideally in the Key Information Document (KID) to get an idea about whether the ETF pays a dividend. Keep in mind that even if an ETF attempts to pay dividends, these payments aren’t guaranteed and depend on the performance of the companies held in the fund. Also, most tech companies tend to spend money fuelling further growth rather than paying dividends.
What is the best Vanguard technology ETF?
Currently, there’s only one specific Vanguard technology ETF. It’s called the “Vanguard Information Technology ETF (VGT)”. So, this is the best Vanguard technology ETF because it’s the only option. To learn more about Vanguard ETFs, read our guide.
All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.
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