The technology sector moves quickly, so if you’re looking to invest here, it could make sense to buy a tech exchange-traded fund (ETF). A tech ETF is an easy way to build a tech portfolio, letting you play the sector if you think it’s going to run higher – and you can do it without analyzing the individual companies. An ETF also provides diversification, reducing your risk compared to buying a few individual stocks.
What are the main kinds of tech ETFs?
The tech sector is large, and for purposes of classification, it’s called “information technology” as part of the GICS classification system. That system breaks the tech sector down into three major industry groups:
- Software and services – This industry group includes software companies and IT services companies.
- Technology hardware and equipment – This group includes three main areas: communications equipment; technology hardware, storage and peripherals; and electronic equipment, instruments and components.
- Semiconductors and semiconductor equipment – This group includes the “chip” companies that make semiconductors and those that produce supporting equipment.
If you’re looking for broad exposure to tech, you can find funds that invest across the sector, giving you a diversified cross-section of players.
What to look for in an ETF
When investing in ETFs, it’s useful to look at a few aspects of each ETF so that you actually buy what you think you’re buying. Here are three key things to look for:
- The sub-sector – Each sub-sector may respond differently to developments in the industry. For example, software companies will respond differently to growing demand than semiconductor companies, which often have to deal with the cyclicality of that sub-sector. So you need to know what kinds of companies your ETF owns.
- The investment track record – The track record of the ETF can give you an indication of how the fund might perform in the future, though there are no guarantees. Has the ETF outperformed or underperformed the industry? The sub-sector can heavily influence the track record, since not all tech sub-sectors perform the same.
- The expense ratio – Pay attention to the expense ratio, which tells you how much it costs to own the fund annually as a percent of your total investment in it.
Finally, it’s worth noting that larger ETFs tend to charge lower expense ratios, because they can spread the costs of running the fund …….