by Tom Taulli | August 7, 2012 12:48 pm
2012 has been a volatile year for technology stocks. Companies like Research In Motion (NASDAQ:RIMM), Dell (NASDAQ:DELL) and Nokia (NYSE:NOK) have seen major losses, and the pain also has spread across thought-to-be-hot social operators like Facebook (NASDAQ:FB), Groupon (NASDAQ:GRPN) and Zynga (NASDAQ:ZNGA).
Despite this, you’d be hard-pressed to find anyone who’s generally bearish on the growth prospects for technology, especially over the long term.
A great way to make such a broad, directional bet is either through a mutual fund or exchange-traded fund. These vehicles can help juice up your portfolio while offering you the protection of diversification. But how should you invest? To start, here are five funds to explore:
Since 1995, Huachen Chen and Walter Price have managed the Allianz RCM Technology A (MUTF:RAGTX) fund, which currently wields $957 million in assets. The pair’s record is sterling, with an average annual return of about 13% during their tenure.
To reduce the portfolio’s risk, Chen and Price focus on large tech operators like Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT), but still harness scrappy growth plays like Fusion-io (NYSE:FIO) and Tesla Motors (NASDAQ:TSLA). Portfolio turnover is a hefty 171% per year, so the pair clearly aren’t afraid to unload underperforming stocks.
The fund is costly, though — RAGTX charges 1.6% in expenses as well as a 5.5% load fee. But it requires just a $1,000 minimum investment, and does garner a 4-star Morningstar rating.
The Waddell & Reed Science & Technology A (MUTF:UNSCX) fund has a broad mandate. Not only does it own the usual tech suspects like Apple and Google (NASDAQ:GOOG), but it also holds traditional companies that benefit from technological innovations, such as insurer UnitedHealth Group (NYSE:UNH) and seed & chemicals giant Monsanto (NYSE:MON).
While UNSCX’s portfolio manager Zach Shafran does look for growth opportunities, he still is disciplined when it comes to valuations — his hope is to avoid suffering huge drops in his holdings, though it occasionally means missing out on short-term moves in the sector.
Regardless, UNSCX has proven to be strong over the past decade, with an average annual return of 11.26%. Expenses are reasonable at 1.35%, but UNSCX also has a 5.75% load fee; however, you need just $500 to get into the fund. Waddell & Reed Science & Tech also boasts a 4-star rating.
The core focus of the Buffalo Discovery (MUTF:BUFTX) fund is to search for plays in megatrends, such as cloud computing, mobile and biotechnology. Then, BUFTX will engage in deep analysis of each company, including poring into the management team and seeking out strong free cash flows, scalable business models and competitive advantages.
Thus, in addition to traditional tech holdings like Apple and Cisco, it also has holdings like high-growth biopharma firm Amylin Pharmaceuticals (NASDAQ:AMLN) and storage provider NetApp (NASDAQ:NTAP).
BUFTX has been a consistent winner for the past three years, averaging annual returns of about 16% — this year is just slightly behind at more than 14%. It’s the highest-rated mutual fund on the list, getting 5 stars from Morningstar, and it’s also the most fee-friendly, with no load and just 1.01% in expenses. Minimum investment is $2,500.
ETFs often are able to provide lower fees because the portfolio is tied to an index rather than requiring professional management.
One of the top tech ETFs is the Vanguard Information Technology (NYSE:VGT) fund, which has about $2.4 billion in assets. It is based on the MSCI U.S. Investable Market Information Technology 25/50 Index, which is heavily weighted to large caps like Apple, IBM (NYSE:IBM) and Intel (NASDAQ:INTC).
For the past three years, VGT has posted an impressive average annual return of 15.7%. Also standing out is its thin 0.19% expense ratio, far undercutting the mutual fund options.
While VGT and a number of other funds offer broader tech exposure, there’s something to be said for more focused ETFs. For example, if you want to get exposure to the growing world of cloud computing — a technology that leverages the Internet to deliver business applications, which allows for lower costs and improved capabilities — you can invest in the First Trust ISE Cloud Computing ETF (NASDAQ:SKYY).
SKYY holds 40 companies, including financial app provider NetSuite (NYSE:N) and collaboration relationship management company Salesforce.com (NYSE:CRM).
SKYY has only been in operation for more than a year — it’s down about 7% since its inception, though up about 9% in the past 52 weeks. And while it’s a passively indexed fund like VGT, its expenses are higher, at 0.6%.
Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned securities.
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