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.
Exchange-traded funds (ETFs) can simplify the investing process substantially. ETFs are appealing to those 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. Read on to learn more about what you need to know before investing in a technology ETF.
Understanding technology ETFs
ETFs are marketable securities that track an index, a commodity, bonds or a collection of assets. A sector ETF invests in the stocks and securities of a specific industry, 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. In addition to that, ETFs help mitigate the risks of investing in companies and instead disperse investment capital over an entire market.
Tech ETFs can help investors get their foot in the door even if they aren't confident about market nuances. They are considered a safe and easy way to step into the sector and provide a higher chance of a sound return.
Market participants who want to exert control over the technology stocks 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 over 110 tech ETFs in the US. Some focus on specific niches, such as artificial intelligence ETFs or fintech ETFs, but the largest technology ETF with intriguing capital gains is the Invesco QQQ Trust ETF (NASDAQ:QQQ). As of February 4, 2022, it boasted US$195.26 billion in assets under management.
Another key tech ETF is the ARK Innovation ETF (ARCA:ARKK), actively managed by ARK Invest. It offers exposure to emerging technologies such as genomics, fintech, autonomous tech, robotics and cloud computing.
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 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 Meta Platforms (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. Some of its top holdings include PayPal (NASDAQ:PYPL), Mastercard (NYSE:MA) and Visa (NYSE:V).
For investors looking to gain exposure to the lucrative semiconductor market, there are a number of well-performing options including: the iShares Semiconductor ETF (NASDAQ:SOXX), the VanEck Semiconductor ETF (NASDAQ:SMH) and the Direxion Daily Semiconductor Bull 3x Shares (NYSE AMERICAN:SOXL).
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, it's necessary to weigh personal risk tolerances 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 to consult a financial advisor before adding an ETF to your 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 option for investors looking to gain exposure to a market while mitigating risks, particularly those new to the tech sector and those who are more devoted to a specific sector rather than an individual company. The technology sector is not immune to market volatility; however, it is projected to continue dominating the global investment space for years to come.
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.
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