In the never-ending quest for the best stocks to buy, one category often gets left out: exchange-traded funds.
Sure, an ETF is a basket of stocks rather than just one stock, but if you want to bet on a popular trend without betting the farm on one or two companies, ETFs are the way to go.
And considering today’s rapid pace of technological innovation, looking to technology ETFs can turn up some exciting opportunities.
Of the stock market’s 11 sectors — as defined by Morningstar — the tech sector boasts the second-highest returns over the last year (+27%); only healthcare stocks (+29%) managed to outperform tech.
While we should always be mindful of reversion to the mean — the tendency of short-term abnormal returns to eventually correct themselves to more closely match historical performance — I just don’t see tech cooling off anytime soon.
Three sub-sectors of technology catch my eye in the stock market today: cloud computing, cyber security, and social media. Thankfully, there are three tech ETFs that focus on these areas: the Fist Trust ISE Cloud Computing Index Fund (SKYY), PureFunds ISE Cyber Security ETF (HACK), and the Global X Social Media Index ETF (SOCL).
Tech ETFs to Buy Now: First Trust Cloud Computing Index Fund (SKYY)
YTD Return: 8%
Expense Ratio: 0.6%
Cloud computing has become an essential component of how we access content, store data and interact with web-based services, and there are more than a handful of companies eagerly vying for a sliver of that ever-growing pie.
Well, you can own a piece of that pie with the SKYY ETF.
With a diverse portfolio of 38 stocks, the SKYY ETF invests in companies “engaged in a business activity supporting or utilizing the cloud computing space,” and the stock needs a market cap above $100 million. Admittedly, this liberal application of cloud computing allows for stocks like Netflix (NFLX) and Zynga (ZNGA) to sneak their way into its ranks, but there are more than enough legit players in the field to make this a solid play on the future of the cloud.
You know what they say: “Perfect is the enemy of the good.” And with the global cloud computing market projected to be worth $270 billion by 2020, it’s best not to scrutinize the SKYY ETF too closely. With stocks like Salesforce (CRM), Red Hat (RHT), Rackspace (RHT) and Intuit (INTU) under its umbrella, SKYY shouldn’t have trouble capitalizing on this rapidly growing market.
Tech ETFs to Buy Now: PureFunds ISE Cyber Security ETF (HACK)
YTD Return: +21%
Expense Ratio: 0.75%
Looking for timely picks in the ETF area? Look no further than HACK, the cybersecurity ETF. Although the fund holds 31 different stocks, the year-to-date performance has been remarkable; the fund’s 21% returns outpace the S&P by 18 percentage points.
The appropriately named HACK ETF, though designed to track the software-heavy cyber security industry, doesn’t only focus on software companies; it also holds stocks that sell hardware and other cybersecurity-related services. For example, Cisco Systems (CSCO) and Juniper Networks (JNPR), both known for their networking hardware, make up about 8% of the HACK ETF portfolio.
With industry pioneers like FireEye (FEYE), Palo Alto Networks (PANW) and Fortinet (FTNT) taking the spotlight in the wake of the China-U.S. government hack, the HACK ETF has exposure to some of the best names in cybersecurity. Each of those three stocks is up more than 35% in 2015.
Tech ETFs to Buy Now: Global X Social Media Index ETF (SOCL)
YTD Return: +15%
Expense Ratio: 0.65%
Let’s get this out of the way quickly: If you’re a card-carrying value investor, you’ll probably hate the SOCL ETF. In fact, you’ll probably have your card revoked if you bought into SOCL. That’s because the fund contains a number of high-flying, hot stocks that trade at big ol’ premiums to the wider market.
That said, what do you expect from a basket of leaders in the still-nascent world of social media? Profits aren’t exactly the name of the game at this point. Facebook (FB) just decided to start monetizing Instagram last week, for cryin’ out loud — three years after buying it.
These companies are all about potential.
With low interest rates making fixed income investments wildly unattractive, potential alone is enough to get you by (at least for now) in the stock market. I wouldn’t buy and hold the SOCL ETF for the long term, but if you’re looking for a speculative play on today’s social media leaders, SOCL is the fund for you.
Just be careful: With 62% of its assets locked up in its top-10 holdings, SOCL leans heavily on high-P/E stocks like FB, Tencent, and Linkedin (LNKD). Stocks with far more tenuous futures like Pandora (P) and Yelp (YELP) also grace its top-10, so if you can embrace the idea that markets are sometimes irrational and all you want to do is take advantage of that, then the SOCL ETF is right up your alley.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at firstname.lastname@example.org.