ETF Deep Dive: iShares Expanded Tech Sector ETF (IGM)

It's all about GICS sectors

You can classify stocks in numerous ways, but one of the most followed and cited methods is the Global Industry Classification Standard (GICS) from MSCI.

This system separates stocks into 11 sectors: technology, financials, healthcare, consumer discretionary, consumer staples, energy, industrials, materials, real estate, telecommunications, and utilities.

The important thing to note is that some stocks commonly referred to in the media as "technology" aren't actually classified as tech by GICS.

For example, Amazon and Tesla are both in the consumer discretionary sector, alongside companies like Nike and McDonald's. Another case is Alphabet (Google) and Meta Platforms (Facebook), which fall under the communications sector, along with Verizon and Comcast.

The takeaway? Both VGT and XLK use indexes that follow GICS sectors, and thus, lack exposure to these other members of the Magnificent Seven.

With VGT and XLK, you only get Nvidia, Apple, and Microsoft from this elite group, missing out on significant players like Amazon, Tesla, Alphabet, and Meta Platforms.

IGM vs. XLK and VGT: Why I like IGM better

IGM neatly sidesteps the sector classification issue by tracking the S&P North American Expanded Technology Sector Index. This index includes around 280 holdings, explicitly encompassing select equities from both the communication services and consumer discretionary sectors.

As of July 30th, six out of the seven Magnificent Seven stocks (excluding Tesla) are among the top 10 holdings of IGM. Collectively, these stocks account for just over 42% of the ETF's weight.

Moreover, IGM includes stocks that VGT and XLK would have excluded, such as streaming, social networking, and video game developers.

Examples include Netflix, Electronic Arts, Snap Inc., Pinterest, Take-Two Interactive Software, and Roblox. This makes IGM a more comprehensive option for investors seeking extensive tech sector exposure. You also get some Canadian tech stocks such as Shopify.

The ETF isn't without its drawbacks, however. Notably, IGM has a 0.41% expense ratio, which is four times higher than VGT and XLK.

Despite this, it remains quite liquid, with a 0.03% 30-day median bid-ask spread. Additionally, it has been gaining popularity, recently surpassing $5 billion in assets under management (AUM).

Is IGM the only option?

No, IGM is not the only option. BlackRock also offers the iShares U.S. Technology ETF

This index classifies sectors differently, resulting in the inclusion of some technology-analogous stocks from the communication services sector, such as Meta Platforms and Alphabet. It even includes some industrial sector stocks like defense contractors Leidos and CACI International.

However, IYW does not include consumer discretionary tech-analogous stocks like Amazon or Tesla. The only notable consumer discretionary holding it currently has is DoorDash, which isn't a particularly exciting prospect for tech investors.

Overall, while IYW offers a slightly different composition with its unique sector classifications, it still falls short of providing the comprehensive tech sector exposure that IGM offers by including stocks across multiple relevant sectors.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.