There’s no mincing words about what happened to Big Tech’s biggest names last week.
Companies including eBay (EBAY), Intel (INTC) and Google (GOOG) dipped after posting results that missed Wall Street expectations, but the biggest loser was Microsoft (MSFT), whose earnings were handcuffed by a Surface tablet-related charge and whose shares got knocked around by more than 11%.
But if you take a minute to shake off last week’s jab, you’ll remember that long-term, technology as a sector provides all sorts of opportunity for snagging nice returns. Broadly speaking, humans are becoming nothing if not more reliant on technology. And right now, critical megatrends like mobile, cloud computing, social media and Big Data are all helping to drive growth in the sector.
But if you’re not quite sure where to fish in tech stocks, consider jumping into an exchange-traded fund instead. These funds give you exposure to a number of these trends, and help protect your backside from poor single-stock performances.
Here are three to consider:
The Technology SPDR (XLK) is the biggest name in technology ETFs, with a hefty $11.5 billion in assets under management.
The XLK essentially provides broad exposure to the tech world, holding the 77 technology companies in the S&P 500. Its top five holdings are Apple (AAPL), Microsoft, Google, IBM (IBM) and AT&T (T) — and at respective weightings between 13.1% (AAPL) and 6.35% (IBM), each of the stocks has a significant impact on how the fund performs.
As a note, the fund isn’t wholly comprised of companies that are considered pure-play tech — there are communication stocks like AT&T and Verizon (VZ), as well as financial services stocks like payment processors Visa (V) and MasterCard (MA), though clearly all those companies are heavily technology-based.
Because of the fund’s huge scale, State Street Global Advisors is able to charge dirt-cheap expenses of 0.18%, or $18 of every $10,000 invested. That helps keep more of the returns — roughly 15% on average during the past three years — in investors’ pockets.
First Trust ISE Cloud Computing Index
Cloud computing allows companies and individuals to use software by accessing the Internet. This results in lower costs because there is no need for buying infrastructure such as servers or hiring expensive consultants. The technology also has benefits like real-time access to data, which can be a competitive advantage for companies.
According to IDC, the cloud market is expected to grow to $72.9 billion in 2015 from its $21.5 billion tally in 2010, translating into a compound annual growth rate of 27.6%.
To play this massive tech trend, consider the First Trust ISE Cloud Computing Index (SKYY). This ETF is based on a proprietary index of 40 stocks, with a minimum market cap requirement of $100 million.
Its holdings include companies involved both in software and cloud infrastructure, such as Rackspace (RAX), Aruba Networks (ARUN), Salesforce.com (CRM) and NetSuite (N), as well as larger, more diverse companies with some cloud computing offerings including Oracle (ORCL) and Google.
However, under its mandate, included stocks must be engaged in a “business activity supporting or utilizing the cloud computing space,” and that “utilizing” part also gives you holdings such as streaming video website Netflix (NFLX), social media site Facebook (FB) and game-maker Zynga (ZNGA).
SKY is a relatively new fund that is up just 11.5% since its inception a little more than two years ago, though it’s up nearly 24% in the past 52 weeks.
Expenses are a bit pricier than XLK at 0.6%.
First Trust NASDAQ CEA Smartphone Index Fund
When Yahoo (YHOO) reported its earnings this week, CEO Marissa Mayer made it clear that mobile was the future. Of course, many other tech leaders — from companies like Microsoft, Facebook, eBay and Zynga — have stressed the same thing.
This year alone the number of mobile devices has exceeded the global population, which is roughly 7 billion.
Of course, there is an ETF for the mobile megatrend, too: the First Trust NASDAQ CEA Smartphone Index Fund (FONE), which is based on a proprietary index that has 60-plus stocks. To be included, a company must be classified as a “smartphone operator” according to the Consumer Electronics Association. Some of the top holdings include Foxconn and Sony (SNE), and the fund also holds other well-known names like Nokia (NOK), BlackBerry (BBRY) and Samsung (SSNLF).
Total return on this ETF was an impressive 36% in the past year, which includes a dividend yield of nearly 1.2% thanks to a focus on blue-chip tech stocks. The fund also is the most expensives of these three, however, at 0.7% in fees.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.