Investors in the tech sector have been riding the wave of momentum, particularly with the rise of AI and Nvidia. The iShares U.S. Technology ETF (NYSEARCA:IYW) is a popular choice for those looking to capitalize on this trend. This ETF, which has been around since 2000 and has $19 billion in assets under management, tracks the Russell 1000 Technology RIC 22.5/45 Capped Index.
The top three holdings in the fund – Microsoft, Nvidia, and Apple – make up a whopping 50% of the portfolio. While this concentration has worked well so far, some investors may be wary of the lack of diversification. A significant stumble by any of these companies could spell trouble for the fund.
When we look at the sector composition of the fund, Software & Services make up 36%, followed closely by Semiconductors at 35%. These two sectors have been driving the momentum in the tech industry, but the high Price-to-Earnings ratio of 44 raises concerns about the fund’s valuation.
Comparing IYW to the Technology Select Sector SPDR Fund ETF (XLK), we see that IYW has outperformed since October 2022, largely due to the higher allocation of Nvidia in its holdings. However, choosing between the two funds can be challenging, as there is no clear sustainable outperformance over time.
Investing in IYW gives investors exposure to the mega-cap tech names that have been driving market gains. However, the high concentration at the top of the fund and the historical volatility of the tech sector raise some red flags. While the fund has performed well, it may be too expensive fundamentally for some investors’ liking.
In conclusion, while IYW offers access to the right areas of the tech sector, the high concentration risk and expensive valuation may give some investors pause. As with any investment, it’s essential to weigh the potential rewards against the risks. If you believe in the future of tech and are willing to accept the volatility, IYW may be worth considering.