5 Questions to Ask When Buying a Technology ETF

by on April 17, 2014 | ETFs Mentioned:

Technology is advancing more and more quickly as the years go on, so it is no surprise to see this sector gain popularity among investors.  As such, technology ETFs have become investor favorites, as Wall Street continues to buzz about a number of tech firms that are continually rolling out never-before-seen products. When it comes time to choose the right tech ETF for you, the options can be a bit overwhelming, as there are over 30 options to choose from.

Below, we outline five key questions every investor should ask themselves before buying a technology ETF to make sure that it is the right choice for them.

1. Are you Looking for Broad or Specialized Exposure?

The technology sector has a wide variety of focuses and disciplines that it covers, making it essential that investors decide exactly what kind of exposure they want. The table below offers the most popular fund for a variety of different technology factions:

Discipline ETF
SPDR Technology Select Sector Fund (XLK, A)
Internet      First Trust Dow Jones Internet Index Fund (FDN, C+)
Software iShares S&P GSTI Software Index Fund (IGV, B+)
Global iShares S&P Global Technology Sector Index Fund (IXN, A-)
Semiconductor iShares PHLX SOX Semiconductor Sector Index Fund (SOXX, B+)
Networking      iShares S&P GSTI Networking Index Fund (IGN, A-)
Cloud Computing First Trust ISE Cloud Computing Index Fund (SKYY, B)
Social Media Global X Social Media Index ETF (SOCL, C)
Robotics Robo-Stox Global Robotics & Automation Index ETF (ROBO, B)

2. What’s the Apple (AAPL) Allocation?

It’s no secret that AAPL is one of the most talked-about stocks in the world, as the stock has developed a loyal following that reaches deep into the investment community. Unfortunately, its large market cap leads to it receiving a large weight in a number of popular ETFs. The chart below displays the three most popular technology ETFs (XLK, VGT, IYW) and their respective weight for AAPL:

Some investors may be perfectly fine with a high allocation to AAPL, but that can be an issue for others. Digging deeper into our Technology Equities reveals several options that mute their AAPL exposure, like the S&P Equal Weight Technology ETF (RYT, B).

3. What Is the Growth Outlook?

When it comes to technology, growth is the name of the game. Dividends are not commonplace in the industry, as companies typically retain earnings for R&D and opportunities on the M&A side of things. Some of the more popular tech ETFs focus on mature companies that may have little left on the growth front. Others focus on companies that are still in their infancy and have some room to run. Of course, the latter exposure will be far more risky, as the technology space is quite cut-throat; it is not uncommon to see firms fail due to intense competition in the tech world.

Tech ETFsIf you are looking for a more stable play on mature companies, you are likely best off with one of the three large cap ETFs mentioned in #1. However, there are other options like the S&P SmallCap Information Technology Portfolio (PSCT, B-).

4. Is It Here to Stay?

The is a question that keeps a number of investors up at night; is this technology here to stay or is it just another fad? Investors in Kodak learned that lesson the hard way, as the digital world destroyed the once-prominent tech company in a matter of years. Though it can be hard to predict, be sure the the underlying holdings of your ETF (especially if it is specialized) are companies that are poised to handle a changing environment. The tech world moves at light speed, and if your investment can’t keep up, you can quickly end up on the sour end of a trade.

5. How Much do You Want to Pay?

Expenses are key in the ETF world, as many of the products are designed to keep more money in the pockets of their investors. Below, we list the 10 cheapest technology ETFs currently on the market:

ETF Expense Ratio
MSCI Telecommunications Services Index ETF (FCOM) 0.12%
MSCI Information Technology Index ETF (FTEC) 0.12%
Information Tech ETF (VGT) 0.14%
Technology Select Sector SPDR (XLK) 0.18%
S&P SmallCap Information Technology Portfolio (PSCT) 0.29%
Market Vectors Semiconductor ETF (SMH) 0.35%
SPDR S&P Semiconductor ETF (XSD) 0.35%
SPDR S&P Software & Services ETF (XSW) 0.35%
iShares MSCI ACWI ex U.S. Information Technology ETF (AXIT) 0.48%
iShares North American Tech ETF (IGM) 0.48%

We should note that there is a seven-way tie for funds charging 0.48%. The remaining ETFs are: IGN, IGV, IXN, IYW, and SOXX.

The Bottom Line

Keeping up with the technology world can be a tall order, making it hard to pick the right investment vehicle for your objectives. Our list of questions to ask before buying a tech ETF will help you narrow down your options and eventually pick a fund that best suits you.

Follow me on Twitter @JaredCummans.

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Disclosure: No positions at time of writing.