Investing in tech is an incredibly appealing option for many investors. Behind every small company is the hope that it may become the next Apple (NASDAQ:AAPL) or Google (NASDAQ:GOOGL). Of course, this is rarely the case.
The tech market also brings a lot of risk to the table. If investors want to look outside the already-established tech giants to gamble on a company with greater growth potential, they also have to take on the associated risk. That’s where ETFs, or exchange traded funds come in. ETFs offer a middle ground between investing in the monolithic tech giants like Google, Cisco (NASDAQ:CSCO) and IBM (NYSE:IBM) and small cap niche companies working in specific, and highly volatile, areas of the tech sector.
The Investing News Network (INN) previously spoke with Andrew Chanin, the CEO of PureFunds, to gain his expert perspective on the benefits of investing in a tech ETF. Read on to hear Chanin’s expert opinion on why a tech ETF might be right for you.
Tech ETFs address central market need
PureFunds is a New York-based research and business management firm that sponsors a suite of pure-play ETFs. The company, founded in 2010, was borne out of the recognition that tech ETFs have a very important place in today’s market, and yet this sector is currently being underserved. As Chanin explains, “we realized that there are plenty of ETFs that cover very broad areas. . . . But specific industries that investors that are looking to get exposure to” were being ignored by existing ETFs.
So why are ETFs so important for the tech market? Chanin believes it is because they occupy a middle ground between investing in large tech companies that do a bit of everything and small cap companies that have a very specific market. Investors are keen to become involved in specific tech subsectors (think cybersecurity or mobile gaming), without the significant risk of picking just one or two companies in the area to invest in. As Chanin explains, “because these industries are early, evolving, shifting and changing, it’s hard to pick just one or two companies” in the space. ETFs, therefore, allow investors to take a bet on the market as whole, rather than specific companies operating in that space.
All told, the PureFunds suite of ETFs address specific sectors of the market that have been conventionally difficult to invest in. Today, some of it’s most successful ETFs include the PureFunds ISE Big Data ETF (NYSEARCA:BIGD), the PureFunds ISE Cyber Security ETF (NYSEARCA:HACK) and the PureFunds ISE Mobile Payments ETF (NYSEARCA:IPAY).
Key sectors for tech ETFs
The thematic nature of the PureFunds ETFs means that significant research goes into each market before deciding to create a fund. According to Chanin, the first step when deciding which sector to create an ETF for is “heading what investors are looking for access to in this specific industry.” Whether that’s cyber, big data, or mobile gaming, there has to be a significant investor buzz surrounding that market.
However, it’s not enough to be the “latest buzzword,” cautions Chanin. The industry “also has to have staying power, and be near the early stages of its evolution.” This checklist also presents good considerations for investors when looking to become involved in a new market. There has to be market buzz, but also staying power for the sector. Otherwise, it’s not worth your time as a long term investment.
So where are the hot markets in the tech sector today? As we’ve already noted, PureFunds sponsors highly successful ETFs in the cybersecurity big data, and mobile payments sectors. However, the company is also involved in riskier sectors as well. Its PureFunds Video Game Tech ETF (NYSEARCA:GAMR) and PureFunds Drone Economy Strategy ETF (NYSEARCA:IFLY) represent two of the company’s newer and potentially more volatile ETFs.
Tech ETF: Potential challenges
Of course, tech ETFs, particularly in the volatile spaces that PureFunds ETFs operate, don’t come without challenges. From Canin’s perspective, one of the most significant challenges when creating a new ETF is determining the boundaries for a specific sector. Tech, he notes, is perpetually transgressing simple categorization, and there is no easy code to separate out the big data companies and cybersecurity companies from other businesses in the general market. However, this is also a strength for these ETFs. Because the are pure-play thematic ETFs, all of the companies included are directly linked to their specific subsector, meaning that the ETF will experience all of the highs (and the ensuing lows) of a precise industry.
From an investor perspective, one of the challenges of these tech ETFs is the volatile markets in which they operate. Nascent and quickly evolving, the technology in these industry subsectors is always morphing into something new. The inherent risk involved in such a market has some investors wary of these ETFs. However, as Chanin succinctly puts it, “just because it may be a volatile industry, doesn’t mean that investors don’t want exposure.”
When it comes down to it, it just depends on your precise investing philosophy whether or not tech ETFs are a good option for you. For some investors, the risk associated with these markets is enough to turn their attention away to safer stocks. However, for those individuals ready to take on the risk (and promise of big reward) in big data, drones, video gaming and mobile payments, amongst others, the volatility is part of the allure. These ETFs allow investors to mitigate risk by spreading their investments out across many different companies in the sector, while still having the guts and glory associated with these developing sectors. Therefore, it’s possible to see it in another way: these ETFs aren’t particularly volatile. Instead, they are working to mitigate risk for investors bold enough to enter these markets. All in all, tech ETFs offer a solid middle ground for investors looking to enter these innovative markets.
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This article was originally published on April 26, 2016, and has been updated as of April 24, 2017 by Jocelyn Aspa.
Securities Disclosure: I, Morag McGreevey, hold no direct investment interest in any company mentioned in this article.