Forget the Nasdaq -- Buy This Magnificent ETF Instead

It's been another excellent year so far for the Nasdaq Composite. Year to date, the index has generated a 19% return.

Yet by digging just a little deeper, investors could do even better. Here's one more-focused exchange-traded fund (ETF) worth considering.

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What is the Fidelity MSCI Information Technology Index ETF?

The Fidelity MSCI Information Technology Index ETF (FTEC -1.00%) is a technology-focused ETF, that tracks a basket of companies across the software and hardware industries.

In terms of holdings, the fund is top heavy. Microsoft, Apple, and Nvidia make up almost half of its total exposure. Its top 10 holdings are:

*Percentages as of Aug. 21, 2024.

Notably absent from the fund's holdings list are some familiar names for tech investors: Meta Platforms, Alphabet, and Amazon. That's because Meta Platforms and Alphabet -- the parent companies of Facebook and Google, respectively -- are classified as communication services businesses. As such, they are lumped in with telecom providers, entertainment and media conglomerates, and other associated businesses -- rather than information technology companies. Meanwhile, Amazon is classified as a consumer goods stock, even though the company operates the largest cloud services business in the world -- Amazon Web Services (AWS).

At any rate, those exclusions shouldn't be seen as a negative for this fund. Indeed, their exclusion provides investors with a more concentrated set of holdings focused purely on the hardware and software industries, which may appeal to some investors. The heavy weightings of semiconductor makers like Nvidia, Broadcom, and Advanced Micro Devices ensure that fund owners have plenty of exposure to a cutting-edge industry that is supplying the physical parts needed for the AI revolution. Furthermore, large holdings in software giants like Microsoft and Adobe mean that investors also gain exposure to companies that are producing innovative AI-powered tools.

How has the fund performed over time?

Without a doubt, tech stocks have performed well over the last decade, so it's no surprise that the Fidelity MSCI Information Technology Index ETF has too.

FTEC Total Return Level data by YCharts.

Indeed, as you can see above, a $10,000 investment in the fund made in 2014 would have grown to nearly $63,000 today. In fact, the fund has generated compound annual growth of 20.2%. That's well ahead of the compound growth rates of either the S&P 500 (13%) or the Nasdaq Composite (15.8%) over the same period.

Nevertheless, there are risks in owning this -- or any other -- ETF. For one, the fund is highly concentrated in the "big three" -- Apple, Microsoft, and Nvidia. That concentration has benefited the Fidelity MSCI Information Technology Index ETF in the past, but it could harm its performance in the future.

Similarly, as noted earlier, the fund lacks exposure to several other "Magnificent Seven" stocks such as Amazon, Alphabet, and Meta Platforms. Future outperformance from those companies wouldn't be captured by the Fidelity fund.

Last, the fund's overall focus on the tech industry presents its own problems. For one thing, few of the companies in its portfolio pay significant dividends -- or any dividends, for that matter. Overall, the fund has a dividend yield of only 0.7%, which makes it a poor choice for income-focused investors. In addition, the fund's laser-like focus on the tech industry presents a sector concentration risk. Potential challenges like increased regulation, decreased enterprise spending, or an overall slump in economic growth could hit the tech sector harder than other more resilient segments of the economy.

All that said, investors who are willing to assume the higher risk that comes from owning a basket of tech stocks may be handsomely rewarded. For that reason, investors may want to consider the Fidelity MSCI Information Technology Index ETF.