ETFs to Buy as Microsoft's Shares Slide Despite Q1 Earnings Beat

Shares of Microsoft (MSFT) slid 2.9% at the bourses yesterday, even after the software giant comfortably surpassed analysts’ expectations for first-quarter fiscal 2026 earnings and revenues. The decline was most likely triggered by the company’s announcement of a higher capital expenditure outlook for fiscal 2026 compared to fiscal 2025, reversing its earlier guidance that indicated a slowdown in spending growth.

This pullback presents an opportune moment for exchange-traded-fund (ETF) investors to consider funds heavily exposed to Microsoft. This is because an elevated capital spending reflects MSFT’s commitment to innovation and long-term growth potential, making ETFs with significant Microsoft weightings attractive for investors looking to benefit from ongoing technology transformation and AI-driven expansion.

ETFs like iShares Dow Jones US Technology ETF (IYW), iShares Top 20 U.S. Stocks ETF (TOPT), Select Sector SPDR Technology ETF (XLK), Vanguard Information Technology ETF (VGT) and Fidelity MSCI Information Technology Index ETF (FTEC) provide diversified exposure to Microsoft's growth while spreading risk across other leading tech firms.

Now, before diving into the specifics of these ETFs, let us do a detailed analysis of how Microsoft performed in the first quarter, in terms of other metrics.

A Brief Analysis of MSFT’s Q1 Results

Microsoft’s fiscal first-quarter adjusted earnings per share (EPS) beat the Zacks Consensus Estimate by 13.2%, while its revenues topped the consensus mark by 3.6%. On a year-over-year basis also, the company delivered a solid performance. Its EPS surged 25.2%, while its revenues soared 18.4%.

The upbeat revenue performance was driven by strong demand for cloud and AI offerings.

Segment-wise, MSFT recorded solid revenue growth across all its segments. While the Productivity & Business Processes segment’s revenues grew 17% year over year, revenues from the Intelligent Cloud unit surged 28%. On the other hand, the More Personal Computing segment delivered 4% revenue growth.

The company ended the fiscal first quarter with total cash, cash equivalents and short-term investments of $102.01 billion compared with $94.56 billion as of June 30, 2025. MSFT returned $10.7 billion to shareholders in the fiscal first quarter through dividends and share repurchases.

Looking ahead, as the demand for AI services continues to increase exponentially, Microsoft continues to strengthen its long-term strategic partnership with ChatGPT-owner, OpenAI Global, LLC (“OpenAI”), with which the former has been collaborating since 2019. With this aim in view, on Oct. 28, 2025, Microsoft signed a deal with OpenAI, which enables OpenAI to purchase an incremental $250 billion of Azure services. This deal offers a substantial future revenue generation opportunity for Microsoft.

For the second quarter of fiscal 2026, Microsoft expects to generate revenues between $79.5 billion and $80.6 billion, which reflects growth of 14% to 16%. For Azure, MSFT anticipates revenue growth of approximately 37% in constant currency as demand exceeds capacity. To this end, the company expects to remain capacity-constrained through at least the end of fiscal 2025.

Microsoft-Heavy ETFs to Buy

iShares Dow Jones US Technology ETF (IYW)

This fund, with net assets worth $22.40 billion, offers exposure to 140 U.S. electronics, computer software and hardware, and information technology companies. Of these, Microsoft carries the second spot, holding 14.33% of the fund.

IYW has surged 30.5% year to date. The fund charges 38 basis points (bps) as fees. Its volume is good at an average of 902,454 shares a day. This fund holds a Zacks ETF Rank #2 (Buy).

iShares Top 20 U.S. Stocks ETF (TOPT)

This fund, with net assets worth $424.6 million, provides exposure to the 20 largest U.S. companies by market capitalization within the S&P 500 Index. Of these, Microsoft carries the second spot, holding 13.72% of the fund.

TOPT has soared 21.1% year to date. The fund charges 20 bps as fees. Its volume is at an average of 598,588 shares a day. This fund holds a Zacks ETF Rank #2.

Select Sector SPDR Technology ETF (XLK)

This fund, with assets under management (AUM) worth $97.04 billion, offers exposure to 68 companies from technology hardware, storage and peripherals; software; communications equipment; semiconductors and semiconductor equipment; IT services; and electronic equipment, instruments and components industries. Of these, Microsoft carries the second spot, holding 12.19% of the fund.

XLK has soared 29.8% year to date. The fund charges 8 bps as fees. It traded at a volume of 1.96 million yesterday. This fund holds a Zacks ETF Rank #1 (Strong Buy).

Vanguard Information Technology ETF (VGT)

This fund, with net assets worth $128.3 billion, offers exposure to 314 companies that provide technology software and services, technology hardware and equipment, as well as manufacturers of semiconductor and semiconductor equipment. Of these, Microsoft carries the third spot, holding 13.09% of the fund.

VGT has soared 27.6% year to date. The fund charges 9 bps as fees. Its volume is at an average of 598,588 shares a day. This fund holds a Zacks ETF Rank #2.

Fidelity MSCI Information Technology Index ETF (FTEC)

This fund, with net assets worth $16.15 billion, offers exposure to 289 information technology companies that trade in the U.S. equity market. Of these, Microsoft carries the third spot, holding 13.09% of the fund.

FTEC has soared 27.6% year to date. The fund charges 8 bps as fees. This fund holds a Zacks ETF Rank #1.
 

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This article originally published on Zacks Investment Research (zacks.com).

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