These tech funds belong in your portfolio.
The growth in technology stocks continues as companies across many sectors use more data and store it in the cloud, generating higher profit margins and returns for investors. The tech sector is the most sensitive sector to gross domestic product growth, gaining 7.1% on average for every 1% GDP growth in the past 10 years, says Jodie Gunzberg, managing director, chief institutional investment strategist at Morgan Stanley Wealth Management. Another distinguishing characteristic of the tech industry is that it generates a relatively high percentage of revenues from overseas at nearly 60%, she says. Here are seven tech exchange-traded funds to add to your portfolio.
Technology Select Sector SPDR Fund (ticker: XLK)
The Technology Select Sector SPDR Fund is a broadly diversified large-cap ETF that tracks the Technology Select Sector Index. The top three holdings are Apple (AAPL), Microsoft Corp. (MSFT) and Nvidia (NVDA). “With stronger earnings in the second half of 2020 and continued growth in 2021 coupled with an increased focus on raising dividend payments, the technology sector is poised to outperform the broader market,” says Todd Rosenbluth, head of ETF and mutual fund research at CFRA, a New York financial research company. “The sector is also driven more by secular trends, including cloud computing and cybersecurity needs and not a cyclical recovery.”
Vanguard Information Technology ETF (VGT)
The Vanguard Information Technology ETF tracks the MSCI US IMI Information Technology 25/50 Index. This is an index consisting of small, midsize and large companies that work in the information technology sector. Large-cap companies tend to have “more consistent revenue streams and stronger balance sheets, which can be helpful in times of economic uncertainty,” Rosenbluth says. Investors interested in large capital gains should always have tech exposures in their portfolios, says K.C. Ma, a finance professor at the University of West Florida in Pensacola. Tech stocks perform well in low interest rate and growing economic environments. “For the last 20 years, 3% long-term interest rates and 3% GDP growth rates have become a permanent part of the U.S. economic reality,” he says.
S&P Technology Dividend Aristocrats ETF (TDV)
The S&P Technology Dividend Aristocrats ETF invests in tech companies that are well-established and have raised their dividends for at least seven years. These companies have generated stable earnings, demonstrated solid fundamentals and shown strong histories of growth along with profit. “Companies that increasingly are raising their dividends have clearer insight into their growth prospects and the ability to reward shareholders with an income component in addition to capital appreciation potential,” Rosenbluth says. The current market environment is the best one for technology stocks to outperform the broader market with average stock returns, Ma says. The fund’s top holdings include Xilinx (XLNX) and Booz Allen Hamilton (BAH).
Global X Cloud Computing ETF (CLOU)
This ETF invests in companies that work primarily in cloud-based computing, including software, infrastructure and platforms that own or manage data centers and also manufacture or distribute hardware. Cloud computing is one of the few winners amid the pandemic, Ma says. CLOU is up more than 50% in 2020 after the pandemic forced many to work remotely. Only four of the 38 stocks in the fund have posted negative returns in 2020, while five of the stocks have climbed more than 150%, he says. “The bulls believe that cloud companies are still considered a viable investment even after the pandemic because there is some permanency in the change in working style,” Ma says. One drawback is that these stocks “seem overvalued based on the historical standards,” he says. “Critics often compared these stocks to the dot-com days when investors pushed the share prices to such an inflated bubble level that the drastic fallout will be inevitable.”
iShares Expanded Tech Sector ETF (IGM)
The iShares Expanded Tech Sector ETF owns stocks of companies in the software, hardware, internet marketing and interactive media industries in the communication services and consumer discretionary sectors. The S&P 500 doesn’t have a traditional tech sector in the way that most people view the asset class, so many big tech names are part of the communication services sector, says Mike Loewengart, managing director, investment strategy at E-Trade. “Investors should keep in mind that tech isn’t always ironclad and can be a volatile area of the market,” he says. “With antitrust concerns looming large, there’s potential to see big tech names come under pressure. For those seeking growth potential, a higher allocation to tech could be appropriate given the fast-pace nature of companies within the sector.”
First Trust Cloud Computing ETF (SKYY)
SKYY is a niche ETF that focuses on cloud computing companies, which allow users to obtain data anywhere. The tech ETF includes well-known companies such as enterprise software platform company Oracle (ORCL) as well as hosting and connectivity behemoth Amazon.com (AMZN) and Twilio (TWLO), an IT services company that provides text messages and voice calls. Tech stocks are beneficial for investors when the economy is exhibiting a falling U.S. dollar and increasing GDP, Gunzberg says. The software and services industry group has gained even more than the sector, up 7.8% on average for every 1% GDP growth. This compares with an average gain of 4.8% from the S&P 500 per 1% GDP growth on average. Both the semiconductor and semiconductor equipment industry and the technology hardware and equipment industry gained 6.4% and 6.3%, respectively, on average per 1% GDP growth, she says.
iShares U.S. Technology ETF (IYW)
The iShares U.S. Technology ETF owns stocks of U.S. computer software and hardware, electronics and informational technology companies. The tech sector produced a total return of 172% for the last 20 years, compared to 63% from the S&P 500, Ma says. The sector’s total return is 27% year to date, compared to 5% for the S&P 500. “The icing on the cake is that the tech outperformance relative to the general market has increased dramatically in the more recent period due to the friendly economic scenarios of low interest rates and stable economic growth,” he says. Tech stocks generate more volatile returns and the “relative movement may be further exaggerated, easily to 15 to 20 times of the average market move due to company-specific factors,” Ma says. “This is why investing in tech ETFs is most efficient to diversify and reduce the extremely high-risk individual constituent stocks, compared to other ETFs of more stable stocks.”
Seven tech ETFs to buy:
— Technology Select Sector SPDR Fund (XLK)
— Vanguard Information Technology ETF (VGT)
— S&P Technology Dividend Aristocrats ETF (TDV)
— Global X Cloud Computing ETF (CLOU)
— iShares Expanded Tech Sector ETF (IGM)
— First Trust Cloud Computing ETF (SKYY)
— iShares U.S. Technology ETF (IYW)
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