Beyond FAANG, Past XLK: Other ETFs For Tech Exposure

The 1990s were historic for the stock market as technology giants built the internet into what we know it as today. 

Many of those stocks fell by the wayside. Today’s leaders are often referred to as FAANG for the initials of the stocks that make up that group.  

And despite the fact that Google is now Alphabet, Facebook is now Meta and Apple is...well, still Apple, FAANG has ruled the stock market to the point where even when the rest of the globe’s equities and the smaller U.S. companies are included, those other market segments barely make a dent in the overall weighting of the global all-cap indexes.  

But the flip side of that story is clear: historically high market concentration and valuations that rely quite a bit on lofty future expectations. That does not mean that the big tech stocks are any less dominant and vital. But it does mean that it helps to look around.  

So, while the icon of the sector in terms of ETF selection is the $70 billion Technology Select Sector SPDR ETF (XLK), that ETF has been a victim of its own success. Microsoft and Apple alone make up more than 40% of that fund, and a total of 10 stocks comprise 65% it.  

The pressing issue for tech investors, and those determining how big a role technology stocks should play going forward, has a lot to do with their current valuations. XLK trades at 39 times trailing 12-month earnings and more than eight times sales. That latter figure is, historically speaking, more than just an anomaly. 

It's reminiscent of an anecdote from the dot.com bubble. Scott McNealy, Sun Microsystems Inc.'s CEO (the computer maker and creator of the Java programming language, bought by Oracle Corp. in 2009) told a group of analysts on a quarterly call that the current price of his stock implied that over the next 10 years, he would have to take all the firm’s projected sales, and not pay nearly all his firms’ expenses, including people, to justify the valuation Wall Street was putting on the stock. 

It was a rare moment where a CEO with a highly appreciated stock during a manic market period essentially “stopped traffic” by expressing his belief that his own stock was grossly overvalued.

So, let’s look beyond the borders of the giant tech stocks, rather than hold our breath waiting for a contemporary version of that incident from 25 years ago. Because ultimately, an ETF’s collection of stocks is worth what someone will pay someone else to buy it from them. And while investors with heavy tech exposure have done quite well, the question for each advisor or self-directed investor is whether their risk appetite and desire to pursue aggressive returns is the same now as it was when they started building what may have amounted to giant pile of unrealized capital gains.

Beyond FAANG for ETF Exposure to Tech

For instance, the Global X Cloud Computing ETF (CLOU) is a $420 million ETF that came to market in 2019 and covers the emerging business that allows data to be stored in a safer, more efficient way. And, since storing information is fraught with bad actors trying to get their hands on it, the $1.7 billion Amplify Cybersecurity ETF (HACK) gives investors access to a range of businesses that aim to prevent the modern version of crime and warfare: that which occurs online.  

ETFs exist to cover software, cybersecurity, electronic payments and other subsections. So technology investing of the past is still as viable as ever, just more expensive from a valuation perspective. But when advisors and investors look beyond the “usual suspects” in the FAANG group of companies, there’s a lot to discover.