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1 tech ETF to buy and 1 to avoid

1 tech ETF to buy and 1 to avoid

 


Fortune does not always favor the bold.

Investing in technology stocks can be confusing, complicated, or both, which is where exchange-traded funds (ETFs) come in. Instead of digging through hard-to-understand tech companies, tech-focused ETFs make investing easier by allowing investors to instantly diversify their portfolios.

But not all ETFs are created equal, and some have performed better than others over the years. Here's one blue-chip tech ETF investors should consider buying and holding, along with one that appears to have lost steam after coming into the spotlight during the pandemic.

Buy this ETF: Invesco QQQ ETF

The Invesco QQQ ETF (QQQ 0.95%) is made up of the top 100 companies that make up the Nasdaq Composite Index. The “Magnificent Seven” stocks — the big technology companies at the forefront of today's artificial intelligence (AI) boom — are spread across the fund's top 10 stocks. About 59% of the ETF is made up of technology stocks, followed by consumer discretionary stocks at 18%, and it gets further diversified from there.

If you look at the chart below, you can see that this fund has significantly outperformed the Nasdaq Composite Index over the past decade. Successful companies typically grow larger over time, rise to the top of the Nasdaq, and are included in the Invesco QQQ. In other words, this ETF is like a collection of Nasdaq's best-known and brightest stars.

QQQ Total Return Levels Data by YCharts.

No one can guarantee that Invesco QQQ will continue to perform so well in the future, and it's not without risks: overheated valuations could lead to depressed underlying stock prices, hurting the overall performance of the ETF.

But the blue-chip tech stocks included in this ETF tend to be well-established (and sometimes dominant) names with plenty of cash to invest in growth and return profits to shareholders. That's a long-term win for investors and helps explain the Invesco QQQ ETF's strong history.

Avoid this ETF: Ark Innovation ETF

The Ark Innovation ETF (ARKK 1.77%) takes a very different investment approach, despite having a similarly high concentration in technology stocks. Founded and managed by Cathie Wood, the ETF focuses on innovation and invests in promising companies in emerging industries. It gained notoriety a few years ago for its successful large investment in Tesla. Some of its key holdings are tied to the company's investments in other growth industries, including fintech, digital advertising, and AI.

Investors should understand that this doesn't necessarily mean the fund targets large or established technology stocks. Its willingness to take high-risk swings makes the fund much more volatile. The fund significantly outperformed the Nasdaq Composite Index in a low-interest-rate environment that favored growth stocks, but its performance has declined since interest rates rose a few years ago.

^NACTR data from YCharts.

So why should you avoid the Ark Innovation ETF now? There are a few problems. First, inflation hasn't fallen as much as officials hoped. Wall Street went into this year believing several rate cuts were possible, but rates have remained unchanged so far into 2024. This could keep pressure on the types of stocks the ETF holds.

Secondly, the fund is actively managed, meaning there is room for misjudgments that could negatively impact returns, and it also has high expenses at 0.75% (Invesco QQQ is 0.2%).

summary

Investors are turning to two different styles of ETFs: the passively managed Invesco QQQ, which tracks an index, and the Ark Innovation ETF, which actively rotates its holdings.

While Invesco QQQ may not have the same explosive upside potential as the Ark Innovation ETF, well-performing companies will grow and rise to the top of the ETF, while the Ark Innovation ETF is more volatile and has significantly underperformed in the current economic climate.Because it is actively managed, the fund manager needs to pick the right stocks and buy and sell at the right time.

Ultimately, the Invesco QQQ Trust ETF is the better buy because it's simpler and produces more sustainable investment returns.

Justin Pope has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.

Sources

1/ https://Google.com/

2/ https://www.fool.com/investing/2024/05/27/1-tech-etf-to-buy-hand-over-fist-and-1-to-avoid/

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