Technology exchange-traded funds (ETFs) outperformed this year as artificial intelligence (AI) gained widespread adoption. Investors were more optimistic about an economic soft landing in 2024, underpinned by moderating prices and continued economic growth.

The top-performing funds of 2023 have significant exposure to companies at the forefront of AI, such as Microsoft Corp. (MSFT), Alphabet Inc. (GOOGL), and NVIDIA Corp. (NVDA). The growth in AI and cloud computing applications helped fuel corporate earnings in the sector throughout the year. About 90% of technology companies surpassed earnings expectations in the third quarter.

For the economy overall, moderating consumer prices and a robust labor market raised hopes of a more dovish Federal Reserve and the avoidance of a recession in 2024.

The top five 2023 ETFs below generated the best YTD returns. Inverse and leveraged ETFs, along with funds that have assets under management (AUM) of under $1 billion, were excluded from consideration. All data is as of Dec. 1, 2023.

Communication Services Select Sector SPDR Fund (XLC)

• Year-to-date return: 35.82%
• Fund category: large-cap growth equities
• Expense ratio: 0.1%
• Inception date: June 18, 2018
• Issuer: State Street Global Advisors

XLC aims at a similar return to the S&P Communication Services Select Sector Index, a market-capitalization-weighted benchmark comprising U.S. telecommunication, media, and entertainment companies in the S&P 500.

The fund’s basket of 22 holdings includes Meta Platforms (META), Alphabet Class A (GOOGL) and Class C (GOOG), and Netflix (NFLX), along with HBO parent AT&T (T) and The Walt Disney Co. (DIS). XLC substantially gained from Meta’s 166.37% YTD return, as the tech giant had about a quarter of the ETF’s AUM.

iShares Expanded Tech Sector ETF (IGM)

• Year-to-date return: 51.99%
• Fund category: technologies equities
• Expense ratio: 0.41%
• Inception 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-cap-weighted benchmark made up of U.S. and Canadian technology companies. As the fund’s name suggests, it offers broad coverage of the North American tech sector with a portfolio of 277 holdings.

IGM’s top three holdings—Microsoft (MSFT), NVIDIA (NVDA), and Apple (AAPL)—each weigh over 8%. NVIDIA’s approximately 265% gain since the start of 2023 helped generate the fund’s impressive YTD return.

Technology Select Sector SPDR Fund (XLK)

• Year-to-date return: 32.68%
• Fund category: technology equities
• Expense ratio: 0.10%
• Inception date: Dec. 16, 1998
• Issuer: State Street Global Advisors

XLK looks to generate returns that closely match the S&P Technology Select Sector Index. The benchmark includes large-cap and megacap technology stocks in the S&P 500. Avoiding smaller, less stable technology names helps reduce the fund’s volatility.

The ETF made a heavy play on Microsoft and Apple, with each tech behemoth carrying a portfolio weight of 23.89% and 22.88%, respectively. That bet has paid off handsomely in 2023, with Microsoft up 57.29% YTD and Apple up 54.02% YTD.

iShares Expanded Tech-Software Sector ETF (IGV)

• Year-to-date return: 55.22%
• Fund category: technology equities
• Expense ratio: 0.41%
• Inception 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-cap-weighted benchmark comprising U.S. and Canadian software companies.

IGV’s portfolio of 115 holdings includes leading software names, such as Microsoft (MSFT) and Adobe (ADBE), as well as slightly smaller sector constituents like cybersecurity software maker Palo Alto Networks (PANW) and Synopsys (SNPS), a company focused on automation software.

Schwab U.S. Large-Cap Growth ETF (SCHG)

• Year-to-date return: 29.38%
• Fund category: large-cap growth equities
• Expense ratio: 0.04%
• Inception date: Dec. 11, 2009
• Issuer: Charles Schwab

SCHG seeks to provide returns similar to the following indices: the Dow Jones U.S. Large Cap Growth Total Stock Market Index and Large Growth Funds (Morningstar category).

The fund’s basket of over 250 holdings means it has broader coverage than the tracking index, providing exposure to the midcap growth space. Microsoft (MSFT), Apple (AAPL), and Amazon (AMZN) all feature prominently, with electric carmaker Tesla Inc. (TSLA) also in the ETF’s top 10 holdings. Technology services as a sector leads weightings at 43.89%, with healthcare the next largest sector at 13.36%.

The Bottom Line

Many funds and ETFs have exposure to giants in the tech sector. The top ETF of 2023 is iShares Expanded Tech Software Sector ETF (IGV), with a YTD return of 355.22%. Technology ETFs outperformed their peers this year, driven by the widespread adoption of AI and expectations of a soft landing in the economy in 2024. Triple-digit percentage gains in some of the tech sector’s biggest names underpinned the impressive performance of these five funds.

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As of the date this article was written, the author did not own any of the above ETFs.

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