Technology exchange-traded funds (ETFs) outperformed this year as artificial intelligence (AI) gained widespread adoption. Investors were more optimistic about a soft economic landing in 2024, supported by price moderation and continued economic growth.
Key takeaways
- Technology ETFs are the best-performing funds in 2023, driven by the rise of AI.
- The best-performing ETF of 2023 is Communication Services Select Sector SPDR Fund, with a year-to-date (YTD) return of 35.8%.
- Triple-digit year-to-date gains in top tech names, such as Meta and NVIDIA, have helped drive ETF returns.
The best-performing funds of 2023 have significant exposure to companies at the forefront of AI, such as Microsoft Corporation (MSFT), Alphabet Inc. (GOOGL), and NVIDIA Corporation (NVDA). The growth of artificial intelligence and cloud computing applications helped boost corporate profits in the sector throughout the year. About 90% of technology companies beat earnings expectations in the third quarter.
For the broader economy, moderating consumer prices and a strong labor market raised hopes for a more dovish Federal Reserve and avoiding a recession in 2024.
The top five 2023 ETFs below generated their best returns to date. Inverse and leveraged ETFs were excluded from consideration, along with funds that have assets under management (AUM) of less than $1 billion. All data is as of November 10, 2023.
Communication Services Select Sector SPDR Fund (XLC)
- Profitability so far this year: 35.8%
- Fund Category: Large Cap Growth Stocks
- Expense ratio: 0.1%
- Start date: June 18, 2018
- Issuer: State Street Global Advisors
XLC targets similar performance to the S&P Communication Services Select Sector Index, a market capitalization-weighted benchmark comprising U.S. telecommunications, media and entertainment companies in the S&P 500.
The fund’s basket of 22 holdings includes Meta Platforms (META), Alphabet and Netflix (NFLX), along with HBO parent AT&T (T), and The Walt Disney Company (DIS). XLC benefited substantially from Target’s 166.37% year-to-date performance, as the tech giant held about a quarter of the ETF’s assets under management.
iShares Expanded Technology Sector ETF (IGM)
- Profitability so far this year: 33.9%
- Fund Category: Tech Stocks
- Expense ratio: 0.41%
- Start date: March 13, 2001
- Issuer: BlackRock
The ETF aims to replicate the performance of the S&P North American Expanded Technology Sector Index, a market capitalization-weighted benchmark index comprised of U.S. and Canadian technology companies. As the fund’s name suggests, it offers broad coverage of the North American technology sector with a portfolio of 277 holdings.
IGM’s top three holdings, Microsoft (MSFT), Nvidia (NVDA), and Apple (AAPL), each weigh more than 8%. NVIDIA’s roughly 265% gain since the start of 2023 helped drive the fund’s impressive year-to-date performance.
Technology Select Sector SPDR Fund (XLK)
- Profitability so far this year: 32.7%
- Fund Category: Tech Stocks
- Expense ratio: 0.1%
- Start date: December 16, 1998
- Issuer: State Street Global Advisors
XLK seeks to generate returns that approach the S&P Technology Select Sector Index. The benchmark index includes large-cap and mega-cap technology stocks in the S&P 500. Avoiding smaller, less stable technology names helps reduce the fund’s volatility.
The ETF made a big bet on Microsoft and Apple, with each tech giant having a portfolio weight of more than 20%. That bet paid off well in 2023, with both companies up 50.4 and 40.4% year to date, respectively.
iShares Expanded Technology Software Sector ETF (IGV)
- Profitability so far this year: 31.9%
- Fund Category: Tech Stocks
- Expense ratio: 0.41%
- Start date: July 10, 2001
- Issuer: BlackRock
The fund seeks to generate a return that corresponds to the performance of the S&P North American Expanded Technology Software Index, a market capitalization-weighted benchmark index comprising U.S. and Canadian software companies.
IGV’s portfolio of 115 holdings includes leading software names such as Microsoft and Adobe (ADBE), as well as slightly smaller sector players such as cybersecurity software maker Palo Alto Networks (PANW) and Synopsys (SNPS), a company focused on automation software.
Schwab US Large Cap Growth ETF (SCHG)
- Profitability so far this year: 29.4%
- Fund Category: Large Cap Growth Stocks
- Expense ratio: 0.04%
- Start date: December 11, 2009
- Issuer: Charles Schwab
SCHG seeks to provide returns similar to the following indices: Dow Jones US Large Cap Growth Total Stock Market Index and Large Growth Funds (Morningstar Category).
The fund’s basket of more than 250 holdings means it has broader coverage than the tracking index, providing exposure to the mid-cap growth space. Microsoft, Apple and Amazon.com (AMZN) rank high, and electric car maker Tesla, Inc. (TSLA) is also among the ETF’s top 10 holdings. Technology services as a sector lead the weighting with 35.09%, and electronic technology is also well represented with 22.78%.
The bottom line
The top ETF for 2023 is the Communication Services Select Sector SPDR Fund (XLC), with a year-to-date return of 35.8%. Technology ETFs outperformed their peers this year, driven by widespread adoption of AI and expectations of a soft landing for the economy in 2024. Triple-digit percentage gains in some of the tech sector’s biggest names supported the impressive performance of these five funds.
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As of this writing, the author did not own any of the above ETFs.
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