While recent headlines may have you believing that tech stocks are all about dividends, rising cash flows and losing their “momentum mantra,” the truth is there’s still plenty of growth left in the technology sector.
From 3D printing and Big Data to nano- and biotechnology, there are plenty of buzzworthy subsectors within technology stocks that could provide nice long-term profits. But how to pick the right horse?
With exchange-traded funds, of course!
But you don’t want to invest in just any technology ETF. Investors should take a gander at the new iShares Exponential Technologies ETF (NYSEARCA:XT). The new fund promises to be a doozy for those investors with longer timelines.
A Bet on Exponential Tech
Created via a partnership between BlackRock, Inc.’s (NYSE:BLK) iShares division and well-known registered investment advisor Ric Edelman, the new XT ETF follows an interesting strategy of betting on the world’s game-changing technology stocks.
Dubbed “exponential technology,” these are the hypothetically paradigm-shifting technologies and have the potential to transform society — that includes everything from robotics to gene sequencing.
The ETF tracks the new Morningstar Exponential Technologies Index, which tracks 200 different tech stocks that the ratings agency/investment data provider has identified as the leading companies across nine areas of exponential technology. Those areas include:
- 3D printing
- Big Data and analytics
- Energy and environmental systems
- Financial services innovation
- Medicine and neuroscience
- Networks and computer systems
Stocks within the index must have a trading volume of at least $2 million and have a market cap of $300 million. The index is equal-weighted, which helps stress many of the smaller stocks in the index and may offer better long-term growth opportunities.
Despite being a global fund, nearly 67% of XT’s holdings are domiciled in the U.S. The U.K. (5%), France (4.21%), Germany (3.79%) and Switzerland (2.9%) round out the top five country allocations. There is some emerging market exposure via India and China, but it’s not enough to be meaningful or significant.
And despite being a technology ETF, other sectors find their way into XT. The multi-industry and broad, sweeping nature of exponential technology means that it encompasses a wide range of disciplines.
While tech stocks do account for just more than 32% of XT’s weight, the ETF does feature a 29% allocation to the healthcare sector and 11% to industrial firms. Holdings for the new ETF include solar stock leader First Solar, Inc. (NASDAQ:FSLR) biotech Celgene Corporation (NASDAQ:CELG) and industrial Emerson Electric Co. (NYSE:EMR).
Expenses for the XT ETF run a relatively cheap 0.47%, or $47 per $10,000 invested.
Should You Buy the New XT ETF?
Already, iShares may have a hit on its hands. Since launching in mid-March, XT has managed to grow to more than $620 million in assets under management. Much of that initial haul has come from Edelman’s own client holdings, but it is still a staggering sum in such a short amount of time. That haul is certainly justified.
XT could be the ultimate way to play all the high-tech growth sectors in one easy-to-use ticker.
It used to be that if you wanted to play exponential tech, you needed to make a very specific company or specific thematic bet. There are plenty of ETFs and funds that cover various niches within tech stocks. For example, the First Trust ISE Cloud Computing ETF (NASDAQ:SKYY) or SPDR S&P Biotech ETF (NYSEARCA:XBI).
The problem is that “the next big thing” doesn’t always pan out. Remember business-to-business (B2B) Internet firms in the 1990s? There’s some big risk of loss if you choose poorly. Momentum and high-growth stocks can turn on a dime.
However, XT combines them all. There’s no risk when it comes to picking the wrong niche to bet on. If cloud computing turns out to be a bust, biotech is there to pick up the slack. They’re all included.
That makes the new ETF a great holding for more buy-and-hold investors. The addition of some not-so growth-oriented firms adds further ballast to a potentially volatile ETF.
And if you have a truly long horizon — which would give these sorts of disruptive technologies time to … well, disrupt their respective industries — then you have a recipe for great gains. Chuck it in an IRA, and forget about it.
Ultimately, XT provides an easy inroads into some of technologies most promising fields. From big data analytics to the latest gene therapies, it’s all included in one ticker. And given that, the XT ETF makes a great long term play on tech.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.