Few sectors of the economy have proven to be Wall Street game changers over the years, as our highly interconnected global market sometimes leaves little room for uncorrelated returns. Technological innovation and development, however, is perhaps one of the most crucial corners of the market, as this industry continues to be one of the few “growth” frontiers left in the economic landscape. But with such a high potential of lucrative returns, there is a relatively high associated risk. While many other economic sectors, like healthcare and utilities, are associated with consistent returns given the relatively stable nature of their operations, the technology sector is far from predictable. But for those willing to stomach the risk, there are multiple ETF options that focus on this attractive sector [see ETFs To Play Gartner's 2013 IT Outlook].
Whether you are looking for hyper-targeted exposure to nanotechnology or semiconductor stocks, or simply want to cast a wide net over the space, ETFs provide the ideal vehicle for easy and cost efficient access. A close look under the hood of these funds, however, reveals several factors investors should be mindful of.
Though many of the broad-based products offer a relatively deep breadth of holdings, there is one commonality found among almost all of the “mega” tech ETFs: Apple (AAPL). Allocations to this booming company range from as little as under 1% to a whopping one-fifth of a portfolio’s total assets, meaning that the performance of these ETFs are highly dependent on a single stock. Though significant tilts towards Apple have certainly not harmed ETFs in recent years – as the company continues to establish itself as a dominant presence in the tech space – any signs of trouble could have serious ramifications on bottom lines returns [see High Tech ETFdb Portfolio].
The table below highlights five of the most popular technology ETFs, revealing the closely tied relationship between Apple allocations, assets under management and performance history [see Everything You Need To Know About The Apple Dividend]:
- Technology Select Sector SPDR (XLK, A)
- Information Tech ETF (VGT, A+)
- Dow Jones U.S. Technology Index Fund (IYW, A-)
- S&P Global Technology Index Fund (IXN, B+)
- Goldman Sachs Technology Index Fund (IGM, A-)
Though there is nothing inherently wrong with technology ETFs allocating a significant portion of assets to one of the top companies in the space, it is important for investors to realize the dependence of Apple in these popular broad-based funds.
Disclosure: No positions at time of writing