5 Questions to Ask When Buying a Technology ETF
April 17 2014 - 7:00AM
ETFDB
Technology is advancing more and more quickly as the years go
on, so it is no surprise to see this sector gain popularity among
investors. As such, technology ETFs have become investor
favorites, as Wall Street continues to buzz about a number of tech
firms that are continually rolling out never-before-seen products.
When it comes time to choose the right tech ETF for you, the
options can be a bit overwhelming, as there are over 30 options to
choose from.
Below, we outline five key questions every investor should ask
themselves before buying a technology ETF to make sure that it is
the right choice for them.
1. Are you Looking for Broad or Specialized Exposure?
The technology sector has a wide variety of focuses and
disciplines that it covers, making it essential that investors
decide exactly what kind of exposure they want. The table below
offers the most popular fund for a variety of different technology
factions:
Discipline ETF
|
Broad |
SPDR Technology Select Sector Fund
(XLK, A) |
Internet |
First
Trust Dow Jones Internet Index Fund (FDN, B+) |
Software |
iShares S&P GSTI Software Index
Fund (IGV, B+) |
Global |
iShares S&P Global Technology
Sector Index Fund (IXN, B+) |
Semiconductor |
iShares PHLX SOX Semiconductor
Sector Index Fund (SOXX, A-) |
Networking |
iShares
S&P GSTI Networking Index Fund (IGN, B+) |
Cloud Computing |
First Trust ISE Cloud Computing
Index Fund (SKYY, B-) |
Social Media |
Global X Social Media Index ETF
(SOCL, C+) |
Robotics |
Robo-Stox Global Robotics &
Automation Index ETF (ROBO, n/a) |
2. What’s the Apple (AAPL) Allocation?
It’s no secret that AAPL is one of the most talked-about stocks
in the world, as the stock has developed a loyal following that
reaches deep into the investment community. Unfortunately, its
large market cap leads to it receiving a large weight in a number
of popular ETFs. The chart below displays the three most popular
technology ETFs (XLK, VGT, IYW) and their respective weight for
AAPL:
google.load('visualization', '1', {packages: ['corechart']});
function drawVisualization() { // Create and populate the data
table. var data = google.visualization.arrayToDataTable([ ['Year',
'XLK', 'VGT', 'IYW', 'SPY', ], ['AAPL Allocation', 13.50, 12.39,
15.98, 2.85, ], ]); var formatter = new
google.visualization.NumberFormat( {suffix: "%"});
formatter.format(data,1); formatter.format(data,2);
formatter.format(data,3); formatter.format(data,4); // Create and
draw the visualization. new
google.visualization.ColumnChart(document.getElementById('visualization99360')).
draw(data, {title:"AAPL Allocation", width:600, height:400, hAxis:
{title: ""}} ); } google.setOnLoadCallback(drawVisualization);
Some investors may be perfectly fine with a high allocation to
AAPL, but that can be an issue for others. Digging deeper into our
Technology Equities reveals several options that mute their AAPL
exposure, like the S&P Equal Weight Technology ETF (RYT,
B+).
3. What Is the Growth Outlook?
When it comes to technology, growth is the name of the game.
Dividends are not commonplace in the industry, as companies
typically retain earnings for R&D and opportunities on the
M&A side of things. Some of the more popular tech ETFs focus on
mature companies that may have little left on the growth front.
Others focus on companies that are still in their infancy and have
some room to run. Of course, the latter exposure will be far more
risky, as the technology space is quite cut-throat; it is not
uncommon to see firms fail due to intense competition in the tech
world.
If you are looking for a more stable play
on mature companies, you are likely best off with one of the three
large cap ETFs mentioned in #1. However, there are other options
like the S&P SmallCap Information Technology Portfolio (PSCT,
A).
4. Is It Here to Stay?
The is a question that keeps a number of investors up at night;
is this technology here to stay or is it just another fad?
Investors in Kodak learned that lesson the hard way, as the digital
world destroyed the once-prominent tech company in a matter of
years. Though it can be hard to predict, be sure the the underlying
holdings of your ETF (especially if it is specialized) are
companies that are poised to handle a changing environment. The
tech world moves at light speed, and if your investment can’t keep
up, you can quickly end up on the sour end of a trade.
5. How Much do You Want to Pay?
Expenses are key in the ETF world, as many of the products are
designed to keep more money in the pockets of their investors.
Below, we list the 10 cheapest technology ETFs currently on the
market:
ETF Expense Ratio
|
MSCI Telecommunications Services Index ETF (FCOM) |
0.12% |
MSCI Information Technology Index ETF (FTEC) |
0.12% |
Information Tech ETF (VGT) |
0.14% |
Technology Select Sector SPDR (XLK) |
0.18% |
S&P SmallCap Information Technology Portfolio (PSCT) |
0.29% |
Market Vectors Semiconductor ETF (SMH) |
0.35% |
SPDR S&P Semiconductor ETF (XSD) |
0.35% |
SPDR S&P Software & Services ETF (XSW) |
0.35% |
iShares MSCI ACWI ex U.S. Information Technology ETF
(AXIT) |
0.48% |
iShares North American Tech ETF (IGM) |
0.48% |
We should note that there is a seven-way tie for funds charging
0.48%. The remaining ETFs are: IGN, IGV, IXN, IYW, and SOXX.
The Bottom Line
Keeping up with the technology world can be a tall order, making
it hard to pick the right investment vehicle for your objectives.
Our list of questions to ask before buying a tech ETF will help you
narrow down your options and eventually pick a fund that best suits
you.
Follow me on Twitter @JaredCummans.
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Disclosure: No positions at time of writing.
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