Are you in your 40s, 50s, or 60s, and just now starting to invest? If you’re coming to the investing party a bit late, you can give yourself a chance to make up for some of the time you lost by focusing your portfolio on growth stocks. These carry a bit more risk, especially if there’s a recession, but you can end up with better gains in the long run than if your investments just try to mirror the S&P 500.
One way to find a good balance between investing in growth stocks and not taking on too much risk is by using an exchange-traded fund (ETF). ETFs take much of the hassle out of investing, as they spare you the work of researching and picking individual companies, but give you exposure to broad groups of specific types of stocks.
One in particular ETF has been an unusually strong performer in recent years.
A tech-heavy fund with a caveat
So you want to swing for the fences when it comes to pursuing good returns, but you don’t want to take on too much risk? That’s an ambitious ask, but it’s not an impossible one. The fund that could make the most of your returns, especially if you don’t have many years left to go before retirement, is the Technology Select Sector SPDR ETF (NYSEMKT: XLK). It offers exposure to the large-cap and megacap stocks of the S&P 500, but strictly those in the tech sector.
One thing you have to be comfortable with here, however, is the prospect of high portfolio concentration in a couple of big stocks and awkward weighting for some of the others. At the moment, Microsoft and Nvidia combine for 42% of the fund’s overall weight. These aren’t bad businesses to bet on for the long haul, and they are big players in the fast-growing artificial intelligence industry right now. But it’s a risk, nonetheless, which needs to be factored in.
The rules governing how the fund is set up require that no three stocks can account for more than 50% of the fund. If the first two stocks get close to 50%, all other stocks in the fund must have their weighting reduced so they are no more than 5% of the ETF’s total weight to ensure there is diversification. That means that a large stock like Apple accounts for just under 5% of the fund right now even though it is as big as Nvidia and Microsoft. It’s possible in the next quarterly rebalancing, depending on their respective market caps at that point, that Apple may switch positions with either Microsoft or Nvidia and one of those stocks gets its weighting reduced.
The fund has a total of 67 stocks in its portfolio, which is diverse but it doesn’t include every possible tech stock you might imagine. Big names such as Alphabet and Meta Platforms, for example, are not included due to the S&P 500 index classifying them as communication stocks rather than tech.
The growth-focused fund has trounced the market in recent years
Since Nvidia is a big holding, you won’t be surprised to learn that the ETF’s returns have been great of late. In the past 10 years, the Technology Select Sector SPDR has generated total returns (including dividends) of more than 580%. Over the same period, the broader S&P 500 index returned 240%.
What’s promising is that this trend could continue, especially with AI stocks still experiencing phenomenal growth and many businesses investing heavily in tech. Year to date, the ETF has continued to outperform with total returns of 22% versus 19% for the S&P 500.
The danger for investors is that in a bad year for tech, the fund can incur outsized losses. In 2022, when inflation and rising interest rates spooked investors and corporate leaders, the XLK ETF nosedived by 28% while the S&P 500 index declined by just 18%. Tech stocks have recovered fairly quickly from that plunge, but it doesn’t always happen that way. It can take multiple years for tech stocks to recover after a bad patch.
Given that risk, if you’re five years or less away from retirement, then the Technology Select Sector SPDR ETF may not be a suitable fund for your portfolio. But if you still have at least 10 investing years left before you plan to retire, then it could make sense for you, as you would have more time for your holdings to recover from a potential downturn.
The ETF may offer the best of both worlds
If you’re planning for a retirement that’s not too far away, you’ll want to keep your risk low, but perhaps not so low that you miss out on great growth stocks, especially if you feel you’re running out of time to grow your portfolio. This is why I think the Technology Select Sector SPDR fund may offer the best of both worlds for investors who are willing to take on some risk in return for some potentially oversized gains.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Apple, Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
Investing Later in Life? Putting Money in This ETF Can Help You Make the Most of It was originally published by The Motley Fool