TechHeavy

After a steep sell-off in 2022, the technology sector rocketed higher in 2023 and just reached a fresh intraday record high on January 22. It’s easy to see why.

Over the last five years, Apple is up 394% and Microsoft is up 267%. These two companies alone have gotten so big that they both top $3 trillion in market capitalization, making them the two biggest companies in the world.

If you’re interested in the tech sector, but don’t know which stock to choose, an exchange-traded fund (ETF) may be the best and least expensive way to achieve diversification and exposure to different industries. Here’s why the Technology Select Sector SPDR Fund (XLK -1.15%), the Vanguard Growth ETF (VUG -0.19%), and the Vanguard S&P 500 Index Fund (VOO -0.06%) stand out as three easy ways to invest in tech stocks.

Image source: Getty Images.

Betting on the tech sector

With over $58 billion in net assets, the Technology Select Sector SPDR Fund is one of the largest pure-play sector ETFs out there. It’s heavily concentrated, though, with 69.7% of the fund allocated to just 10 holdings.

Data source: State Street Global Advisors.

The tech sector is heavily concentrated in consumer electronics, software, and semiconductors. However, you may notice a few big names missing from the list — namely Alphabet, Amazon, Meta Platforms, Tesla, and Netflix.

Alphabet, Meta Platforms, and Netflix are in the communications sector. Meanwhile, Amazon and Tesla are in the consumer discretionary sector.

So, although these companies are commonly referred to as “big tech stocks,” it’s important to note the distinction regarding sector weights.

The Technology Select Sector SPDR Fund has a mere 0.1% expense ratio, making it a low-cost way to invest in tech, especially if you’re interested in Apple, Microsoft, and the major semiconductor stocks.

A simple yet effective way to invest in megacap growth

Unlike a tech sector ETF, the Vanguard Growth ETF includes the major growth stocks I mentioned above.

Data source: Vanguard.

Compared to the tech ETF, which has 48.9% concentration in Apple, Microsoft, and Nvidia, the Vanguard Growth ETF has practically the same allocation, or 51.2%, invested in the “Magnificent Seven,” which is Apple, Microsoft, Nvidia, Amazon, Alphabet, Meta Platforms, and Tesla. So if you want the Magnificent Seven and not just Apple, Microsoft, and Nvidia, it’s better to go with the Vanguard Growth ETF.

Now, here’s where the funds diverge by quite a bit. The Vanguard Growth ETF includes top growth stocks from pockets of the market that are traditionally value- or income-oriented. The eighth-largest holding is Eli Lilly, a drugmaker that has become the largest healthcare company by market cap. Next comes Visa, the second most valuable financial company behind Berkshire Hathaway and ahead of JPMorgan Chase.

The basic idea of the Vanguard Growth ETF is to achieve sector diversification but only through the lens of growth. For example, the 11th-largest holding is Costco Wholesale, which achieved strong growth despite being in the historically stodgy consumer staples sector.

If you’re looking for exposure to the Magnificent Seven more so than just tech, and like the idea of picking top growth names from other sectors, then this fund and its 0.4% expense ratio may be right for you.

The S&P 500 got a makeover

The Vanguard S&P 500 Index Fund has close to $1 trillion in net assets, making it one of the largest ETFs in the world. Now you may be wondering why a generic S&P 500 index fund would be a good way to invest in the technology sector. Well, the valuation expansion of tech stocks has made the tech sector a staggering 28.9% of the S&P 500. But if you add in Amazon, Alphabet, Meta Platforms, and Tesla — which again aren’t in the tech sector — then the weight is actually 39.8%.

Data source: Vanguard.

I’m still wrapping my head around the fact that 40% of the S&P 500 is in the tech sector plus those big four companies. It makes sense, given how massive these companies are and their ability to generate high cash flows from high margins. It’s hard to put an exact number on it, but there’s no denying that the excitement surrounding artificial intelligence added trillions of dollars in value to the tech sector and tilted the balance of the entire market. If you want to invest in the tech sector but don’t want to necessarily overdo it, then this S&P 500 index fund and its 0.03% expense ratio is probably the most well-rounded option.

The tech sector is unavoidable

There are two key takeaways to this article.

The first is that there are several inexpensive ways to invest in tech and growth in general.

The second is to understand market dynamics, namely what the tech sector is made of, what isn’t in the tech sector, and that the S&P 500 is more tech-heavy than ever before.

The ETFs discussed contain heavy concentration in the most valuable U.S.-based companies. The market is less diversified than it used to be. As long as that continues, the market trajectory, for better or for worse, will be determined by just a handful of companies.