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All Contents © 2018The Kiplinger Washington Editors
By Kyle Woodley, Senior Investing Editor
| October 27, 2017
The technology sector has become the stock market’s dominant growth engine. Tech stocks have outperformed all other Standard & Poor’s 500-stock index sectors over the past three years on a total return basis. They're also the clear leader year-to-date with 26% gains, propelling strong performance from a wide variety of tech exchange-traded funds.
Don’t expect this trend to fade. People the world over are becoming more dependent on technologies such as smartphones and the internet, and whole economic sectors are becoming intertwined with tech, such as manufacturers adopting greater amounts of automation in their plants, or healthcare providers migrating records and offering some services online.
Individual tech stocks can deliver mountains of growth, but selecting the best companies for each industry trend can be fraught with risk – for every successful Facebook (FB), there’s a struggling Twitter (TWTR). There’s also the risk in not exiting soon enough, as investors learned with the likes of BlackBerry (BBRY) and Nokia (NOK).
Tech ETFs allow investors to participate in the sector’s growth – and even in smaller industry trends – across numerous stocks to tamp down risk. Are you bullish on tech generally, or maybe just optimistic about the Internet of Things or cloud computing? Either way, there’s a fund for you.
Here are 11 of the best tech ETFs to invest in the technology sector.
Data is as of Oct. 26, 2017. Click on ticker-symbol links in each slide for current share prices and more. Yields represent the trailing 12-month yield, which is a standard measure for equity funds.<
Share price: $157.96
Market value: $15.6 billion
Dividend yield: 1.1%
Expenses: 0.1%, or $10 annually on $10,000 invested
Let’s start simple. If you’re looking for broad exposure to the whole technology sector – and if you like a deal – you need look no further than the Vanguard Information Technology ETF.
The VGT provides access to more than a dozen tech industries, including semiconductors, systems software, tech hardware and data processing. More practically speaking, that means you have access to Apple (AAPL) and its iPhones, internet search via Alphabet (GOOGL), social media via Facebook and even payments processing via Visa (V) and Mastercard (MA).
The one rub is that while VGT boasts a portfolio of 361 stocks, the fund’s performance is heavily dictated by the sector’s largest companies. This ETF, like many others, is market capitalization-weighted, which means that the larger the company, the more assets the fund invests in it. Thus, $810 billion Apple makes up 13.8% of the fund, and $680 billion Alphabet represents another 10.1%.
While these companies generate boatloads of cash and are financially sturdy, investors should at least be aware of the heightened single-stock risk in the top holdings.
Also, VGT is one of the least expensive tech ETFs on the market, at just 10 basis points in annual expenses. (A basis point is one-hundredth of a percentage point.)
Share price: $167.39
Market value: $1.4 billion
Dividend yield: 1%
When you think of semiconductors, you probably think about the chips that power things such as processes and graphics in computers, tablets and smartphones – and you’re not wrong.
But they’re so much more than that, and increasingly so.
Semiconductor chips have a myriad of applications, and are found in just about anything, from AC/DC power sources and dishwashers to satellite transponders and ultrasound scanners. They’re also the very thing that will support the growing “Internet of Things” – the digital connectivity of everyday objects such as refrigerators and alarm clocks.
The iShares PHLX Semiconductor ETF is the largest fund dedicated to semiconductor companies, and holds 30 of the biggest names in the industry. That includes stocks such as Intel (INTC), the dominant provider of PC chips; Nvidia (NVDA), the hot-running graphics specialist that is expanding into artificial intelligence and autonomous driving; and even Texas Instruments (TXN), whose analog chips have a multitude of uses, especially in the industrial space.
SOXX has a modified weighting system, so assets invested in each stock aren’t perfectly proportional to their market capitalization. However, larger companies still have an outsize pull on the fund, with INTC, NVDA and TXN all commanding 8%-plus weights at the moment.
Share price: $105.13
Market value: $5 billion
Dividend yield: N/A
The internet has stretched into nearly every facet of the human experience, from raising children to our social connections to how we purchase things to how we work. In fact, it has become so ubiquitous that there are numerous internet-focused ETFs worth considering, depending on your goals and risk tolerance.
The first we’ll discuss today is the First Trust Dow Jones Internet Index Fund – a concentrated portfolio of 41 U.S. companies that generate at least 50% of their annual revenues from the internet. However, most of the companies on this list are almost entirely web-reliant.
The top holdings are a who’s who of sites you visit every day, or whose apps you regularly use. They’re also fountains of potential growth. Facebook is the world’s largest social media site, boasting 2 billion monthly active users worldwide on its core site alone, not to mention properties WhatsApp (1.3 billion MAUs) and Instagram (800 million MAUs) – and it’s leveraging the data it’s collecting on all those users to better target ads to them. Amazon.com (AMZN) is the world’s largest e-commerce company, but it’s also America’s largest cloud provider, and its Echo speaker products are making it a likely candidate to dominate the smart home.
In short, FDN provides exposure to the growth of America’s internet behemoths, though its market-cap weighting methodology ensures the largest companies will have the most say in its performance.
Share price: $55.72
Market value: $1.1 billion
Dividend yield: 0.7%
The United States is hardly the only place where the internet revolution is taking hold. In fact, one of the market’s biggest stories of 2017 has been the go-go gains in Chinese internet stocks.
Alibaba Group (BABA), an e-commerce operator that’s frequently referred to as “China’s Amazon,” has rocketed 94% higher this year. In fact, Alibaba is approaching Amazon’s market capitalization so quickly that soon, some may refer to Amazon as “America’s Alibaba.” Tencent Holdings (TCEHY) – whose subsidiaries delve in internet platforms encompassing chat, media and payments, among other things – has climbed 85% so far this year.
It might be difficult to replicate those kinds of gains going forward, but investors still should be optimistic about additional upside in China’s internet industry. Chinese internet users have nearly doubled since 2009, to 721 million people – only 53% of the population, which is far from saturated. Moreover, Cisco forecasts a compound annual growth rate of 26% for the country’s internet traffic through 2020.
The KraneShares CSI China Internet ETF, which has returned 63% so far in 2017, is one of the most direct ways to capture this potential. KWEB boasts a small portfolio of 30 or so Chinese companies that are primarily internet businesses. The fund skews toward mostly larger companies, and thus invests in juggernauts such as Tencent and Alibaba, as well as after-school tutoring specialist TAL Education Group (TAL) and online travel site Ctrip.com International (CTRP).
Share price: $36.09
Market value: $319.4 million
Dividend yield: 0.5%
China is the world’s largest emerging market and one of the biggest internet opportunities, but numerous other EMs are taking huge strides in web connectivity, and as a result, internet companies and e-commerce plays across the world have a real chance to blossom.
Goldman Sachs analysts are increasingly bullish on this front. In September, Goldman raised its global e-commerce forecasts to reflect the rapid growth in such emerging markets as Brazil and India, as well as China. Analysts also cited growing online demand for apparel and groceries due, in part, to the impact of retail store closures. Goldman now see 21% compound annual growth in global e-commerce over the next three years, up from the previous 17% forecast.
The Emerging Markets Internet & Ecommerce ETF allows investors to chase this wider opportunity across developing markets. While you get significant exposure to Chinese internet companies such as Alibaba and Tencent, you’re also investing in companies like South African internet and media company Naspers (NPSNY), Russian search engine Yandex (YNDX) and Mercadolibre (MELI) – the largest e-commerce company in Latin America.
Just know that at its heart EMQQ is largely a Chinese-centric fund. While there are significant allocations to stocks from South Korea (11%), Russia (9.8%) and South Africa (6.4%), China – at 65% of the fund’s assets – still steers the ship.
Share price: $21.55
Market value: $32.2 million
Dividend yield: 0%
Another area of commerce that is rapidly changing thanks to technology is the financial services center, where long lines at the bank are being replaced with camera-enabled deposits and non-bank financial accounts.
Enter the Global X FinTech ETF, which holds a small bundle of 32 holdings involved in the technological advancement of finance.
FINX carries a few names you’d immediately expect off the top of your head, such as relative newcomers like PayPal (PYPL) – one of the first online payments systems that now is worth more than American Express (AXP) by market cap – and Square (SQ), whose point-of-sale systems blossomed among small businesses. There also are old-guard companies such as credit card processor First Data Corp (FDC), and other innovators in the space including TurboTax parent Intuit (INTU) and European payment processor Wirecard.
As Americans and the rest of the world increasingly take their finances online, FINX – which has returned 46% in 2017 – should continue to thrive.
Share price: $19.60
Market value: $65.4 million
Dividend yield: 0.3%
Another Global X “thematic” offering – rather than broad-sector or even industry-specific funds, these ETFs are designed to chase certain economic, technological and other trends – is the Global X Internet of Things ETF.
IoT, as mentioned before, encompasses so-called “smart” devices that use a range of sensors, software and internet connection to better serve an owner’s needs. This technology is being applied in a wide variety of ways, from smartwatches that analyze your physical activities, to thermostats that learn your schedule and adjust temperatures accordingly, to speakers like Amazon’s Echo that can provide information, play music and perform other tasks in response to the human voice.
It’s an enormous market – Gartner predicts that by the end of this year, “8.4 billion connected things will be in use worldwide” – fueled by thousands of companies producing IoT devices. That makes picking winners and losers in the device field itself difficult.
SNSR takes a different approach. Instead of merely targeting companies putting out smart speakers or smart refrigerators, this ETF instead invests in companies throughout the chain – semiconductor companies like STMicroelectronics (STM) that produce chips for smart driving and other applications, and Sensata Technologies (ST), whose sensors help IoT devices function.
In theory, investing in the back-end companies that power many device creators should yield a higher probability of success than trying to guess whose smart speaker will come out on top.
Share price: $39.62
Market value: $1.6 billion
Dividend yield: 0.1%
A less glamorous but certainly lucrative and expanding area of technology is robotics and automation.
There’s nothing new about the increased use of machines to improve the quality and speed of manufacturing, but it’s becoming ever more intelligent and efficient as companies find ways to increasingly automate factories and other facilities. And manufacturers, which have to keep up with one another in both quality and cost controls, are plowing sizable piles of money into these businesses. Research and Markets predicts that the industrial control and factory automation market will grow at a compound annual rate of 7.4% through 2023, when the industry is expected to hit $239 billion.
The Robo Global Robotics and Automation Index ETF and its roughly 90 holdings is designed to benefit from this and other trends propping up the use of robotics.
That includes the likes of Rockwell Automation (ROK) and ABB (ABB), which deal in things such as factory automation, heavy electrical equipment and power solutions. But ROBO also holds companies such as Intuitive Surgical (ISRG), whose da Vinci Surgical System uses robotics to perform minimally invasive surgery, and AeroVironment (AVAV), which produces unmanned aircraft systems (read: drones) used for things such as military surveillance.
Also note that ROBO has a modified cap-weighting system that significantly cuts down on single-stock risk; Japanese robotics company Fanuc is the top holding at the moment at just 1.89%.
Share price: $80.66
Market value: $572.2 million
Dividend yield: 0.2%
If you’re comfortable taking on relatively higher risk in a broad index portfolio, you may want to consider the PowerShares S&P SmallCap Information Technology Portfolio.
Unlike most of the other funds discussed so far, PSCT isn’t focused on a particular theme. Its 90-plus holdings are spread across several tech segments, primarily: electronic equipment, instruments & components (27.7%); semiconductors and semiconductor equipment (27.4%); and software (12.8%). Top holdings are diversified, too, ranging from instruments and subsystems specialist MKS Instruments (MKSI) to commercial laser provider Lumentum (LITE) to mailing and shipping servicer Stamps.com (STMP).
Growth here can come from a couple of places. Like any other tech company, if a particular service or product takes off, these small-cap stocks should, too. And given the idea that it’s easier to double $1 million in revenues than $1 billion, they theoretically should have even more “pop” potential.
But also, because the average market capitalization of companies in this fund is just under $2 billion, many of these businesses are priced right to be acquired by tech’s mega-caps, who sometimes look to grow through mergers. Thus, big buyout premiums can also drive this ETF higher.
Share price: $31.68
Market value: $115.5 million
Dividend yield: 3.1%
While dividend hunters can find a few promising yields in the technology sector, tech ETFs tend to be a little sparse on the income front. Even the First Trust Nasdaq Technology Dividend ETF (TDIV), at a 2.3% yield, produces less income than a 10-year Treasury.
The Fidelity MSCI Telecommunication Services Index ETF, however, provides a much more palatable yield above 3% at the moment, by tapping into that old, reliable income geyser known as telecoms.
But just like the telecom industry itself, the FCOM’s 27-stock portfolio is ruled by the virtual duopoly of Verizon (VZ) and AT&T (T), which account for a respective 23.2% and 20.5% of the fund’s assets under management. In fact, the next-highest portfolio holding after the pair isn’t T-Mobile US (TMUS, 4.5%) or Sprint (S, 2.4%), but cold, hard cash, at a weight of more than 5%.
Compared to most other tech funds that are growth-oriented in nature, FCOM is conservative and yield-focused. Given the saturation of the U.S. telecom market, there’s not much upside to be gleaned here, but this ETF can be looked at as an inexpensive source of stability and income.
Share price: $41.55
Market value: $112.2 million
Lastly, the ARK Web x.0 ETF is an actively managed ETF that is loosely based around cloud computing technology, but is far from just a collection of cloud providers.
ARKW holds companies that “are focused on and expected to benefit from shifting the bases of technology infrastructure to the cloud,” so that includes companies that offer cloud platforms and/or storage, but also companies that use and can otherwise benefit from the expansion of the cloud.
The result is a much more wide-ranging portfolio that includes themes such as big data, the Internet of Things and machine learning. So while you get companies like Amazon, whose Amazon Web Services is the world’s largest cloud services provider, you also get AthenaHealth (ATHN), which provides electronic health record and other healthcare technology services, and even chipmaker Nvidia, which is working with automakers such as Audi and Toyota (TM) to develop driverless car technology.
ARKW’s kicker is that it’s one of just a handful of ETFs to be exposed to blockchain – the virtual transaction ledgers that serve as the basis for cryptocurrencies such as Bitcoin. ARKW features a 5.1% weight in the Bitcoin Investment Trust (GBTC), which tracks the market price of Bitcoin. That has paid off in spades in 2017, as the cryptocurrency’s 475% gains year-to-date have helped drive a 64% return for the ETF.
Just understand that Bitcoin is a largely unregulated technology, so while it has proven it can deliver enormous upside, it’s also extremely risky, making it a potential liability even as a small holding.
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