While it may have taken some time to regain its former glory, the technology story is one that continues to prove itself as a worthy sector to own. Well over a decade ago, the Nasdaq Composite index peaked in a frenzied rush of exuberance that is still remembered as one of the greatest bubbles in modern-day capital markets.
Then, the Nasdaq once again eclipsed its prior apex and taken out the 5,000 price level to join most major market indexes at fresh all-time highs.
Despite that lingering memory of turmoil, investors have become more discerning in their quests for investing in proven technology companies with expectations of growth or return of profits, which has led to the development of specialized indexes to hone in on niche industries, stock performance metrics or fundamental balance sheet characteristics.
The end result is that issuers of exchange-traded funds have introduced nearly 50 varying ways to invest in the technology sector through transparent and diversified vehicles. The following funds offer ways to invest in new emerging trends during the golden age of technology ETFs.
Most investors are familiar with highly publicized tech-heavy indexes such as the PowerShares QQQ Trust, Series 1 (ETF)(NASDAQ:QQQ) or Technology SPDR (ETF) (NYSEARCA:XLK). QQQ and XLK can be thought of as sector benchmarks or core portfolio holdings that offer broad-based exposure to a wide range of companies using a market-cap weighted methodology.
These indexes are designed to select the largest stocks in their respective categories in order to hone in on household names such as Apple Inc. (NASDAQ:AAPL) and Microsoft Corporation (NASDAQ:MSFT). However, they may lack the flare of innovation that more colorful portfolios can provide.
If these funds seem too plain vanilla or don’t hone in on a specific technology theme on your radar, it may be appropriate to drill down to an industry-focused offering. The First Trust Dow Jones Internet ETF (NYSEARCA:FDN), iShares North American Tech-Software ETF (NYSEARCA:IGV) and iShares PHLX Semiconductor ETF (NASDAQ:SOXX) have established themselves in specific areas of technology expertise.
Each of these funds offers exposure to a more concentrated mix of stocks that compete in a close-knit peer group while still retaining the benefits of diversification. Hardware, software and internet-related companies may be worthy of consideration if you are trying to access a precise trend or replace an existing stock in your portfolio with a comparable alternative.
In fact, you can even dive further into the weeds by accessing burgeoning growth areas such as PureFunds ISE Cyber Security ETF (NYSEARCA:HACK) or Global X Social Media ETF (NASDAQ:SOCL). These niche products are designed to capitalize on developing themes within the internet and technology realm as new services and solutions are introduced.
Cyber security in particular has garnered tremendous exposure over the last year as several high profile breaches have led to data theft and the need for improved safekeeping measures.
It’s worth noting though that more specialized ETF segments will likely procure fewer underlying companies and introduce more volatility than a broader technology index. However, that same risk can also lead to outsized gains during favorable growth periods due to a more concentrated mix of stocks. In addition, niche ETFs typically garner a higher expense ratio than broad-based peers as a result of the unique emphasis of the underlying holdings.
The technology theme offers a wealth of options for growth-oriented investors to customize their equity exposure according to their individual needs. Selecting a fund that is appropriate for you goals will come down to your risk tolerance, investment objectives, and current asset allocation mix.
More conservative investors will likely lean towards a sector benchmark-style ETF, while aggressive traders may stray towards boutique indexes with a more strategic focus.
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