How To Avoid Having Big Tech Dominate Your Technology Portfolio

How To Avoid Having Big Tech Dominate Your Technology Portfolio

Investing in ETFs theoretically provides a diversified approach to specific industries. However, the structure of an ETF is very important. Many technology ETFs are often dominated by a few giants, undermining one of the strategy's potential benefits.

For example, take the popular Technology Select Sector SPDR Fund ( NYSEARCA:XLK ) and the alternative ETF Invesco S&P 500 Equal Weight Technology ( NYSEARCA:RYT ). XLK and RYT share the same share of 69%. Internally, however, the fund's basic structure is significantly different.

XLK owns over 50% of the ETF with just three shares. Specifically, XLK's top three assets account for 51.38% of the fund. This includes Apple (AAPL) 23.93%, Microsoft (MSFT) 23% and Nvidia (NVDA) 4.45%.

Meanwhile, RYT has spread its portfolio evenly across 69 titles. This means that AAPL, MSFT, and NVDA make up a small fraction of the fund's composition, no more than the other three stocks in the ETF.

This can make a big difference in income. XLK jumped 20% in 2023, while RYT rose just 6% in a year. This is when XLK heavyweights rise up. AAPL +33.5% YTD, while MSFT and NVDA +26.4% and +87.3% respectively.

While this concentration has benefited 2023 XLK investors, it also increases the risk that a major holding's fall could cause the entire ETF to fall. For example, XLK fell 28% in 2022, while RYT fell less than 25%.

This can also apply to the general mid-market. Jeffreys recently noted that while the S&P 500 (SP500) rose in 2023, the rise was driven by a relatively small portion of the index. Only 32% of stocks outperformed the entire index this year.

Now Read: Apple Q2 Preview: Why It Could Hurt

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