The strong global tech rally over the last six months is once again drawing investor attention. But investors hunting for exposure to tech should remain mindful not to sacrifice portfolio diversity, according to a new Morningstar analyst report.  

Shares in major US-listed tech giants like Google (GOOG) and Microsoft (MSFT) have bloomed so far year-to-date (up 42% and 34% respectively), helping drive the tech-skewed NASDAQ Composite to its best first half in four decades.

Likewise, shares in fellow tech giant Apple (APPL) have rallied more than 55% since the start of January, tipping the company’s market cap above $3 trillion during intraday trading late last week.

An explosion of hype surrounding artificial intelligence as well as better-than expected recent financials from major players are helping the sector recover after a devastating tech selloff in 2022.

The tech rally has also been felt closer to home, with the price return for Morningstar’s Australia Technology Index, which tracks the domestic market’s comparatively smaller ASX-listed tech sector, climbing more than 20% since the start of the year. This compares to a year-to-date price return of just 1.9% for Morningstar’s broader Australia index.

The Australia Technology index’s gains so far this year have largely been led by the Australia’s few major technology players, such as global logistics platform developer WiseTech Global (WTC), which has risen more than 55% over the past six months.

Morningstar analyst Kongkon Gogoi says the year-to-date rally has brought with it a renewed interest in exchange-traded funds offering exposure to the sector but adds that investors should consider volatility before “jumping on the bandwagon”.  

“The resurgent first quarter of 2023 for the sector has elevated investors’ exuberance for the tech-oriented thematic exchange-traded funds, as these ETFs have rallied so far this year through May 2023. However, investors should be wary of the historical volatility of the sector before jumping on the bandwagon.”

Gogoi notes that, while tech-thematic ETFs have proved popular, they may not provide a “prudent and rationale investment case because of the concentration risk and volatility associated with this dynamic sector”. Instead, Gogoi directs attention away from thematics and toward more diversified waters.

“A more sensible approach to accessing the IT sector is through ETFs with better-diversified portfolios that favor the tech sectors,” he says.

“So, while investors may wish to pursue exposure to the technology sector, we consider doing so as part of an overall global investment strategy.“

With that in mind, Morningstar has highlighted three tech-exposed ETFs which also offer a more diversified portfolio for investors to consider. All of these ETFs hold a forward-looking Bronze or Silver Morningstar Medalist rating.

Three diversified ETFs offering tech-exposure

iShares Global 100 ETF (QUAL)

The Silver-rated VanEck MSCI International Quality ETF aims to replicate the MSCI World ex-Australia Quality Index and Gogoi says it presents a strong choice for investors seeking exposure to high quality global equities, including a significant allocation to the tech sector.

“This approach yields a portfolio that has notable differences with the MSCI World ex-Australia Index in two broad areas: It tilts toward more large-cap growth names and has different allocations to sectors and geographies,” he says.

“Technology and healthcare are overweight, while financials are underweight, as their leveraged balance sheets often do not fit the quality parameter of the strategy. We view this composition as sensible for diversifying a typical Australian core equity exposure portfolio, which is dominated by financials and materials stocks.”

QUAL charges a fee of 0.40% per year.

VanEck MSCI International Quality ETF (IOO)  

The iShares Global 100 ETF aims to replicate the well-known S&P Global 100 Index, which itself tracks a basket of 100 large-cap international companies from the S&P Global 1200. The companies in the index are selected based on their global nature and source a substantial portion of their operating income from multiple countries.

Gogoi says the fund, which retained its Bonze Morningstar rating after being reviewed in April of this year, remains a solid choice for Australian investors seeking exposure to global equities.

“Allocations within the fund express sector tilt, particularly toward IT. IT and communications services together, around 40%, represent the largest allocation, followed by healthcare, at 12%, consumer staples, at 12%, and consumer discretionary, at 11%,” he adds.

SPDR S&P World ex Aus Carbon Control ETF (WXOZ)

The final ETF listed here may not be readily considered by investors hunting tech exposure. The SPDR S&P World ex Australia Carbon Control ETF aims to hold a lower carbon intensity relative to its parent index, the S&P Global Large Mid Cap Index, which in-turn looks to represent the top 85% of float-adjusted market cap in each developed and emerging country.

Gogoi says the fund offers investors an environmental, social, and governance factor-oriented core global equity exposure, with tech sector inclination.

“WXOZ is well diversified, with almost 1,000 portfolio constituents, and the sector allocations are largely in line with the parent index,” he says.

“As such, the fund should mirror the parent index performance within a relatively low margin of tracking difference. The sector allocation comprises significant exposure to technology and healthcare—sectors that are underrepresented in the Australian market. “

“All put together, for an increasingly efficient global equity market, WXOZ is an excellent choice considering its price advantage, liquidity, portfolio diversification, and track record of effective implementation. State Street charges just 18 basis points per year for this portfolio, easily making it a compelling ETF in the world large-blend Morningstar Category.”