Take on tech with an ETF
Technology has been the investment of the decade. The benchmark technology index, the NASDAQ Composite, has delivered 287% over the last 10 years, compared to a – still impressive - 185% for the S&P 500 at the time of writing.
Why invest in technology?
Technology giants such as Apple, Microsoft, Amazon and Alphabet have come to dominate the way we live and work, enriching their shareholders in the process. It exerts its disruptive influence on an increasingly diverse range of industries and becomes more embedded in our lives – from the way we shop, work, communicate, and enjoy leisure time.
While the reach and influence of technology grows each year, it's also moving into new areas all the time. Until recently, no-one would have thought of car companies as technology innovators, but today advances in technology separate the winners from the losers. Beyond the auto sector, smart fintechs are challenging cumbersome bank and insurance companies, and clever medical technology is helping to improve healthcare services around the world. This pattern is replicated across multiple industries and no one sector is immune.
This means technology companies are in a strong position to grow faster than the rest of the economy. And at a time when growth is scarce, technology companies have a strong runway of growth ahead of them.
What types of technology ETFs can you invest in?
There are two types of ETFs that you can use to invest in technology - passive ETFs and active ETFs.
Passive tech ETFs
Passive tech ETFs aim to track an established index of technology companies, such as the NASDAQ Composite or the MSCI World Information Technology Index. These give exposure to the largest and most well-known technology names - such as Microsoft, Cisco, Apple and ASML - so can be a no-brainer if you're looking to put your money behind the big hitters.
So a passive index-tracking technology ETF can be a great all-in-one, hands-off way to get exposure to technology companies without having to orchestrate and monitor a portfolio full of dozens of individual shares by yourself.
It's worth noting, however, that many of the large technology indices won’t include firms like Amazon or Tesla, which are actually considered consumer and auto companies! It's good practice when it comes to ETFs to take a look at the top 10 holdings - if not all of them - to see exactly what you're paying for.
Active tech ETFs
Alternatively, there are also actively managed tech ETFs. Rather than tracking the underlying companies in an already-established index, active tech ETFs are run by a portfolio manager who makes continuous decisions about the investments in the fund. They're able to include, exclude or adjust the exposure to certain assets within the ETF at their discretion, usually when they believe they've spotted an opportunity to outperform the market, or to avoid losses when a particular asset is performing poorly.
What can you invest in with a technology ETF?
Apart from the broad index-tracking tech ETFs, there are also more targeted options based on specific parts of the technology market - semiconductors, for example, or cloud computing. As the climate crisis worsens and demand for sustainable technology grows, some of these more unconventional technology subthemes are gaining popularity.
These ETFs may partner with research groups who design specific indices to get exposure to a given theme. A cybersecurity theme, for example, will focus on those companies that generate a specific level of their revenues from cybersecurity. The result should be that investors get very targeted exposure to a single part of the market.
Kane Harrison, CEO at Wombat, says: “Technology-based ETFs have long been popular with investors, but we are seeing demand for more niche themes too, like battery technology - a huge growth market being driven by the increasing adoption of electric vehicles".
Whether you're looking for an opportunity to invest in a broad range of technology companies, or you want to narrow down your focus to something more specific, the beauty of ETFs is that there's a wealth of choice out there, so you will be able to find one that find what suits your unique investing goals and expectations.
If investing sustainably sounds like your sort of thing, make sure you check out our Sustainable Investing Hub to learn more, watch videos, listen to audio clips, and find out which investing persona you are!
What are the risks with investing in tech?
Technology may have been an astonishing investment in recent years, but its performance since the start of the year is a reminder that it can still be a volatile and unpredictable sector.
It's prone to moments where investors become wildly enthusiastic, followed by periods of reappraisal, and these periods of adjustment can often be painful. As of January 2023, the MSCI World Information Technology Index had dropped by 30.79% in the YTD, over 10% worse than the broader MSCI World Index. You can read more about their relative performances here.
There's also the risk of overpaying for technology companies to think about. The growth on offer is often exciting and it can be tempting to jump in when the markets are bullish, but that same market can become too optimistic about a company’s prospects. In this case, even if the company does well, you won’t get the benefit because any gains will already be factored into the share price.
Technology is also fast-moving. The hot sector one year can be old news by the following year, and new competitors can emerge and leave others obsolete. This brings risks for investors, particularly in a sector so rapidly evolving. However, you can manage that risk by holding a diversified portfolio - like one of the broader, index-tracking technology ETFs - and drip-feeding money into markets on a regular basis.
How can I find the right technology ETF?
As always when it comes to investing, step number one should be to make sure you know where your money is going. If you're opting for an index-tracking ETF then you'll know what you're getting already, but a good habit to cultivate nonetheless is to check (at least) the top 10 holdings of any ETF you're considering investing in. This is particularly important for actively-managed ETFs, where asset allocation can change at short notice at the fund manager's discretion.
At the same time, it's important that the technology ETF you're thinking of investing in actually offers something different from the exposure you already hold in other portfolios. Many mainstream indices and global funds already have significant holdings in technology, concentrated in the large global technology names such as Alphabet and Meta. In fact, as of January 2023, technology companies form more than 25% of the S&P 500.
So if you want to super-charge your technology portfolio and get exposure to the firms that aren't already accounted for in the big indices, it may be worth branching out with some targeted, niche technology ETFs that can help you try something new.
Top performing technology ETFs
The tech ETFs with the highest returns in 2022 were:
KraneShares CSI China Internet UCITS ETF EUR [KWBE] | -5.52%
KraneShares CSI China Internet UCITS ETF USD [KWEB] | -6.29%
KraneShares CSI China Internet UCITS ETF GBP [KWBP] | -6.30%
Source: justETF. Data correct as at 01/01/23.
