As 2016 starts to close and we start investing with a head toward 2017, one of the most obvious plays in the market is … well, one of the most obvious plays of at least the past couple of decades: tech stocks.
But as we’ve seen thanks to big momentum moves by the likes of Twitter Inc (NYSE:TWTR), Amazon.com, Inc. (NASDAQ:AMZN), Netflix, Inc. (NASDAQ:NFLX) and more, dabbling in single-name tech stocks can be perilous. That doesn’t mean you shouldn’t do it — that’s what the aggressive allocation of your portfolio is for. But it does mean that if you’re looking to get broad exposure to tech stocks, you would do well to also invest in one or two of the best exchange-traded funds that focus on the space.
ETFs are a great solution for trying to invest in anything from whole sectors to industries to trends like the internet of things or artificial intelligence. That’s because they grant you exposure to a number of players, meaning you don’t have to necessarily guess the one or two best stocks in the space. And the best ETFs allow you to do this for next to nothing in annual expenses.
As we turn the clock forward to 2017, here’s a look at five of the best ETFs that invest in tech stocks.
Best ETFs That Invest in Tech Stocks: Technology Select Sector SPDR ETF (XLK)
If you’re looking to invest in any sector, the first place to look should be State Street Global Advisors’ Select Sector SPDR funds. That’s not to say they’re always the best, but more often than not, they provide strong performance for cheap, and they’re about as liquid as you can ask for.
The Technology Select Sector SPDR ETF (NYSEARCA:XLK) is the largest tech ETF on the planet at just about $13 billion in assets. And its holdings list is a who’s who of big tech, including Apple Inc. (NASDAQ:AAPL), Microsoft Corporation (NASDAQ:MSFT), Facebook Inc (NASDAQ:FB) and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL).
XLK’s performance has outdone most of its broad-based tech peers over the long run, and the ETF is among the cheapest you can buy at just 14 basis points. But no investor should jump in unless they’re OK with the fund’s … well, its weight problem.
Apple makes up roughly 14% of the fund, and Microsoft makes up another 10%. All told, the top five companies represented in XLK — the four above, plus AT&T Inc. (NYSE:T) — make up almost half the weight. That means as they go — for the most part — XLK goes.
That has its advantages in that all of these companies are extremely well-heeled, cash-rich firms that can weather a market blow or two, whether it’s AAPL shelling out more dividends or buybacks, or FB buying out a couple new companies for growth. It has its disadvantages in that the concentration in mega-caps, as well as exposure really only to blue chips, isn’t necessarily the most conducive to rapid price appreciation.
Best ETFs That Invest in Tech Stocks: VanEck Vectors Semiconductor ETF (SMH)
Expenses: 0.35% (includes 6-basis-point fee waiver)
Sometimes, the best money to be made in technology isn’t in the consumer-facing side, but the comparatively boring internals.
For instance, semiconductors.
When you think of Intel Corporation (NASDAQ:INTC), you almost assuredly think of PCs — the declining industry that’s hampering Intel. What you should be thinking, though, is that Intel’s solutions also power everything from digital storage to point-of-sales systems to, more recently, driverless automotion via a partnership with BMW and Mobileye NV (NYSE:MBLY).
Or let’s get really meta and consider Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM), a foundry that serves other semiconductor firms, such as Advanced Micro Devices, Inc. (NASDAQ:AMD), Nvidia Corporation (NASDAQ:NVDA) and Broadcom Ltd (NASDAQ:AVGO). And from time to time, even Intel actually outsources its chipset manufacturing to TSM.
These are the companies that will power just about every emerging technology on the planet, and that’s advantageous to investors because it reduces the risk of investing directly in the more risky front-facing technologies that could flop hard if their gambles are wrong. In short, if a company like AMD powers a number of virtual reality technologies, then it’s a much safer bet than trying to pick which VR company will get it right.
The VanEck Vectors Semiconductor ETF (NYSEARCA:SMH) is a concentrated fund of just 26 holdings, and it’s overweight TSM and INTC at about 15% each. But it covers most of the biggest players across the globe, making it a faithful play in the semiconductor space.
Best ETFs That Invest in Tech Stocks: iShares Exponential Technologies ETF (XT)
If investing in slower-growth blue-chips isn’t your thing, the iShares Exponential Technologies ETF (NYSEARCA:XT) very well might be.
While iShares touts a few reasons to buy, the most important is this:
“The fund’s index uses a unique evaluation process to identify companies developing and/or leveraging promising technologies.”
In other words, XT is trying to get out in front of the crowd. Thus, you’re going to see a number of emerging technologies represented, such as 3D printing and artificial intelligence, not to mention a few other tech avenues that might have been around for a while already, but are really starting to come into their own.
Take a look at the top holdings. AMD products are used in everything from drones to medical imaging. Exelixis, Inc. (NASDAQ:EXEL) is actually a biotechnology company whose developing treatments are focused on ailments from thyroid cancer to tumors. MercadoLibre Inc (NASDAQ:MELI) is a Latin-American e-commerce platform.
Yes, you can practically guarantee that several of XT’s holdings are destined for the scrapyard, as not every emerging technology actually emerges, and some that do don’t do so right away. Heck, the tech world has given virtual reality the ol’ college try several times over the past decade.
But that’s OK. XT also differs from XLK in that it’s equally weighted, rather than market-cap weighted, so currently none of the ETF’s 189 holdings accounts for more than 1.57% of the fund. Thus, total failures are mitigated.
Best ETFs That Invest in Tech Stocks: PureFunds ETFx HealthTech ETF (IMED)
Everywhere you look, you’ll find some gaudy predictions about the future of healthcare technology. For instance …
- Grand View Research sees global healthcare firms investing $410 billion in software, services and internet of things-connected devices in 2022.
- Evaluate Ltd. is projecting a $477.5 billion market in medtech by 2020.
- Research and Markets expects the global healthcare analytics market to explode from $8.48 billion in 2015 to $23.8 billion by 2020.
Long story short: Technology is increasingly encroaching into the healthcare space, and there’s a lot of money to be made there.
The PureFunds ETFx HealthTech ETF (NASDAQ:IMED) is one of a scant few ways to invest broadly in this trend. IMED focuses on three specific areas: healthcare informatics, medical instruments and medical devices. That results in holdings like Quality Systems, Inc. (NASDAQ:QSII), which deals in things such as electronic health records and interoperability solutions for both medical and dental practices, or medical device company ICU Medical, Incorporated (NASDAQ:ICUI), which boasts products such as MicroClave for infusion therapy and hemodynamic monitoring systems.
IMED is a small fund, at just more than $2 million in assets, and the 0.75% expense ratio is far from cheap, but this is one of the best ETF plays on the blossoming healthcare tech market.
Best ETFs That Invest in Tech Stocks: Global X FinTech Thematic ETF (FINX)
Using cash less and less? You’re not alone. Many people have almost completely phased out their use of cash, and that’s thanks to — and benefiting — the fintech space.
The fintech space is awfully broad and combines new and old technologies alike. If you’ve swiped a credit card at a retail store or a restaurant in your life … well, a fintech company is powering that.
But naturally, the space is filled with slightly newer financial technologies as well. There’s PayPal Holdings Inc (NASDAQ:PYPL), which not only is an increasingly popular online payment option, but has expanded to acceptance in brick-and-mortar stores, too. And there’s LendingTree Inc (NASDAQ:TREE), the online exchange that hooks up both individuals and businesses with potential lenders.
The Global X FinTech Thematic ETF (NASDAQ:FINX) invests in 29 such companies, featuring consumer-facing names such as PayPal and Square Inc (NYSE:SQ), as well as companies like SS&C Technologies Holdings, Inc. (NASDAQ:SSNC), which powers complex functions such as trading and accounting for financial firms.
Like IMED, FINX is hardly cheap, but it’s a targeted play on a couple of burgeoning tech industries.