3 Tech ETFs That Could Bounce Back After the AI Selloff

Key Points

• The June tech sell-off showed how quickly interest-rate fears and semiconductor weakness can pressure high-growth AI stocks.
• IGM offers broad technology exposure, while WCLD gives investors a more focused cloud-computing rebound play.
• FINX is a more specialized fintech ETF, giving investors exposure to digital finance rather than traditional mega-cap tech.

A perfect storm of factors may have led to an unusual selloff in the AI space in June, providing investors with a unique opportunity to buy in before growth resumes in earnest. Between expectations that the Fed would maintain or raise rates, unexpectedly soft semiconductor earnings and guidance, and a strong jobs report, investors suddenly found themselves reconsidering whether some of the more speculative plays in the AI space were worth the risk.

Those who remain cautious about the AI world—and not looking to make a specific bet on individual names at this stage—may find tech-focused exchange-traded funds (ETFs) a suitable choice given the selloff. However, the AI (and especially the tech sector) ETF space is considerably large, and identifying good targets from within this growing field can be a challenge. The funds below may be a good place to start a search.

A Fast-Growing and Inexpensive Broad-Based Tech Fund

One of the hottest tech ETFs on the market—and outpacing even the broader Invesco QQQ Trust NASDAQ: QQQ is the iShares Expanded Tech Sector ETF NYSEARCA: IGM. The market-cap-weighted fund offers low-cost, broad-based exposure to the tech space. Unlike many niche tech funds, this one has a sizable portfolio approaching 300 unique stocks. IGM primarily invests in U.S. companies but holds a modest allocation of Canadian firms, a fact that may give it a leg up over some of its competitors.

Because of the weighting strategy here, IGM will favor the biggest names in the tech space, with firms like Apple Inc. NASDAQ: AAPL and NVIDIA Corp. NASDAQ: NVDA enjoying outsized allocations. This means that IGM is not a great choice for investors looking for an AI (or other) niche, but can be a solid option for those looking to lean into a broader tech investment.

In terms of performance, IGM has been shining this year. The fund has returned close to 27% year-to-date (YTD), with gains extending up to about 50% over the last 12 months. With an expense ratio near 0.40%—low compared to some alternatives in the tech ETF landscape—this deal may be too good to pass up for some investors.

A Cloud Computing Fund Hit by the AI Selloff

With just a fraction of the asset base of IGM but nearly double the one-month average trading volume, the WisdomTree Cloud Computing Fund NASDAQ: WCLD also utilizes a much more narrow strategy than its peer. WCLD targets cloud-based software companies and uses an equal-weighting approach, ensuring that its roughly 64 holdings each occupy about the same portion of the overall portfolio.

Given the specialization in cloud computing companies, investors should not look to WCLD for access to bigger tech stocks like the ones that dominate IGM above. Instead, this fund is a good vehicle to build broad exposure to a number of smaller niche firms like DigitalOcean Holdings Inc. NYSE: DOCN—many of which can be a way of gaining access to the AI market.

For its cloud computing bent, investors can expect to spend a bit more for WCLD, but the fund's expense ratio of 0.45% is not significantly higher than IMG's. Where it does differ for the time being is in performance: WCLD has been hit hard by the selloff and is down about 15% YTD. Investors expecting a turnaround might look for a suitable opportunity to buy before that happens.

Fintech Stocks Dominate in a Globally-Focused Fund

Another specialized fund, the Global X FinTech ETF NASDAQ: FINX holds a basket of financial services firms. The fund is particularly interested in companies moving toward a digital finance revolution and looks to companies disrupting financial services around the world. U.S. stocks dominate at about 82% of the portfolio, but FINX also holds companies based in the Netherlands, Canada, Britain, New Zealand, and a range of other countries as well.

Like WCLD, FINX does not provide exposure to large tech companies, instead focusing primarily on smaller names like Fiserv Inc. NASDAQ: FISV and Global Payments Inc. NYSE: GPN. The fund is fairly concentrated at the top, with about half of its assets going to just 10 out of its roughly 75 positions. Still, this concentration helps FINX to be able to offer a dividend yield of 0.68%, which may be an added benefit for investors looking for passive income. Otherwise, FINX has similarly shed value this year, falling nearly 16% YTD while charging an expense ratio of 0.68%. Bullish investors might watch for a reversal.