Interested in investing in a technology ETF? Here’s a breakdown of everything you need to know in order to make that decision.
With the technology sector growing at a rapid pace, tech stocks have earned a strong foothold in the stock market, making tech an attractive — yet challenging — space for the first-time investor. However, exchange-traded funds (ETFs) can simplify this process substantially.
ETFs are appealing to those investors looking to mitigate the risks of investing in individual stocks and generate income over the long term. For market participants curious about investing in this sector, technology ETFs might be a step in the right direction.
The Investing News Network has put together a brief overview of what you need to know before investing in a technology ETF. Read on to learn more.
Understanding technology ETFs
ETFs are marketable securities that track a select sector and include an index, a commodity, bonds or a collection of assets. A sector ETF invests in the stocks and securities of a specific industry or sector, typically identified in the fund title.
Essentially, ETFs allow individuals to add a targeted area of the market to their portfolio rather than having to choose specific stocks to buy. ETFs help mitigate the risks of investing in companies and instead disperse investment over an entire market.
Tech ETFs can help investors who aren’t confident about the nuances of the tech market get their foot in the door. They are considered a safe and easy way to step into the sector and provide a higher chance of a sound investment return.
However, market participants who want to exert control over the technology stocks that they invest in might want to look elsewhere. ETF shares don’t offer a lot of freedom in that regard, since they merely track an index or commodity.
Picking a technology ETF
According to ETF.com, there are at least 71 tech ETFs in the US. Of that total, 39 are focused solely on US companies and three are focused on North American companies as a whole. In Canada, tech fund pickings are still slim and actually trade on US exchanges.
While you can invest in a variety of tech ETFs, such as an artificial intelligence ETF or a fintech ETF, the largest technology ETF with intriguing capital gains is the Vanguard Information Technology ETF (ARCA:VGT). As of late 2020, Vanguard boasted US$38.08 billion in assets under management.
In 2020, many of the best-performing ETFs of the year have been technology ETFs. In fact, four of the best tech ETFs for the year are actively managed by ARK Invest: the ARK Genomic Revolution ETF (BATS:ARKG), the ARK Next Generation Internet ETF (ARCA:ARKW), the ARK Innovation ETF (ARCA:ARKK) and the ARK Fintech Innovation ETF (ARCA:ARKF).
Looking at North America-focused ETFs, which include US and Canadian companies, the options are the iShares Expanded Tech-Software Sector ETF (BATS:IGV), the iShares North American Tech-Multimedia Networking ETF (ARCA:IGN) and the iShares Expanded Tech Sector ETF (ARCA:IGM).
Despite the generality of most tech ETFs, there are still opportunities for investors to choose the market within the sector that appeals to them the most. The iShares US Technology ETF (ARCA:IYW), for instance, tracks some of the largest tech companies, including Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT) and Facebook (NASDAQ:FB).
Another ETF that targets a specific market within the tech sector is the PureFunds ISE Mobile Payments ETF (ARCA:IPAY), which, as its name suggests, follows the mobile payments sector. Its top holdings include PayPal (NASDAQ:PYPL), Mastercard (NYSE:MA) and Visa (NYSE:V).
However, be warned — different areas of the market come with varying levels of risk, as well as fees and expenses. When determining which technology ETF to invest in, people need to weigh their personal comfort levels with potentially unstable investments. As a general rule, the broader the ETF, the more stable it will be. Due to these factors, it may be good practice for market participants to consult a financial advisor before adding an ETF to their portfolio.
To learn more about the best technology ETF for you, here are five tech ETFs for every investing style.
Reaping the benefits of a technology ETF
All told, technology ETFs are an excellent way for investors to go, particularly those new to the tech sector and those who are more devoted to a specific sector rather than an individual company. According to ETF.com, the technology sector was the best-performing sector from 2017 to 2019, and it is projected to continue dominating over the next several years.
This is an updated version of an article originally published by the Investing News Network in 2016.
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Securities Disclosure: I, Melissa Pistilli, hold no direct investment interest in any company mentioned in this article.