Tech stocks might have had the wind knocked out of them to finish last year, but the sector's standing as a long-term source of growth still looks clear.
The world is becoming ever more dependent on technology. If you have any doubts, ask yourself: How long have you spent on your smartphone today? Are you reading this article on it right now? Have you taken an Uber recently? Have a "smart" home-security system? Plan on listening to your smart speaker later? Those are just some of the most obvious advances in tech. Behind the scenes, data centers are increasingly powering American business, health records are going digital, retail is using big-data analysis to better deliver its wares ... you get the point.
The technology sector was brutalized in the fourth quarter of 2018. Almost everything was lower - the Standard & Poor's 500-stock index fell 14% - but tech companies more than carried their weight, dropping 17.7% to make them the third-worst-performing sector during that period. Likewise, though, tech stocks have been among the leaders of 2019's rebound, rallying more than 12%, which in turn has sent numerous tech exchange-traded funds (ETFs) skyward.
The problem with investing in individual tech stocks is the risk. The sector is rife with disruption, and even longtime winners can suddenly find themselves on the outs - ask Nokia (NOK) or BlackBerry (BB). But you can whittle down that risk by investing in large bundles of these stocks, via ETFs.
Here are 13 of the best tech ETFs to buy. These funds allow you to participate in the growth of the whole sector, or even smaller industry trends, while minimizing the risk of single-stock implosions.
SEE ALSO: The 19 Best ETFs for a Prosperous 2019
Vanguard Information Technology ETF
Market value: $18.4 billion
Dividend yield: 1.2%
Expenses: 0.1%, or $10 annually on $10,000 invested
One of the easiest, cheapest ways to get access to the whole technology sector is the Vanguard Information Technology ETF (VGT, $190.00).
But the technology sector is much different than it was a year ago.
In 2018, changes were made to the Global Industry Classification Standard (GICS) that determines which stocks belong in which sectors and industries. This included the creation of the communications sector, which essentially "stole" various stocks from tech, including mega-caps such as Facebook (FB) and Google parent Alphabet (GOOGL) that were responsible for a significant chunk of the tech sector's performance.
As a result, VGT's industry breakdown looks something like this: 20% in systems software, 17% in hardware, storage and peripherals, 16% in data processing and outsourced services, 16% in semiconductors, 11% in app software, and a peppering of several other industries.
Top holdings are still a familiar who's who of big tech, including Apple (AAPL) and Microsoft (MSFT), which together account for almost 30% of the fund's assets. That's important to note, because while VGT does provide access to roughly 320 stocks, there's still a measure of single-stock risk should something go wrong with Apple or Microsoft. (The flip side? Apple and Microsoft are two of the most financially secure companies on the planet, so they have plenty of ways to maneuver should things get really hairy.)
VGT also is one of the least expensive tech ETFs on the market, at just 10 basis points in annual expenses. (A basis point is one-hundredth of a percentage point.)
iShares Evolved U.S. Technology ETF
Market value: $5.2 million
Dividend yield: N/A
If you're looking for a technology ETF that looks a little bit more like how things used to be, look to the iShares Evolved U.S. Technology ETF (IETC, $26.15). To better understand the "Evolved" series, here's an excerpt from our look at the iShares Evolved health-care ETF.
"Rather than a traditional human manager, these funds essentially will be operated by robots. The goal here is for these robots to use language processing and machine learning to think outside the box when it comes to determining what belongs where. As it stands right now, systems such as the Global Industry Classification Standard (GICS) sort companies into sectors and industries. But sometimes, there's not necessarily a clean fit - a company might make just as much sense in one sector as another. The example iShares provides is Amazon (AMZN), which GICS classifies as "consumer discretionary" because it's primarily a retailer - however, the core of its business is based in computer technology, not to mention its growing cloud business is clearly a tech arm. Thus, in iShares' evolved-sector approach, Amazon is actually classified as both a technology company and consumer discretionary company."
Indeed, Amazon is a top-three holding in IETC. Also in the fund? Facebook and both Alphabet classes, which were ushered away into "communications." So the top holdings - which also include Microsoft and Apple up top, as well as Cisco Systems (CSCO), Visa (V), Oracle (ORCL) and MasterCard (MA) - look more like how broad-tech funds were built before the GICS changes.
The clear benefit is getting access to great companies that might not be in the technology sector based on a specific set of written standards, but absolutely leverage (or even create) technological innovations to the benefit of their shareholders.
Invesco S&P SmallCap Information Technology Portfolio
Market value: $337.7 million
Dividend yield: 0.4%
If you're comfortable taking on relatively higher risk in a broad index portfolio, you may want to consider the Invesco S&P SmallCap Information Technology Portfolio (PSCT, $82.85).
PSCT's 90-plus holdings are spread across several tech segments, primarily: electronic equipment, instruments & components (28.9%); semiconductors and semiconductor equipment (26.3%); and software (17.3%). Top holdings are diversified, too, ranging from analog and mixed-signal circuit-maker Semtech (SMTC) to network testing equipment maker Viavi Solutions (VIAV) to cloud-based home-security provider Alarm.com (ALRM).
Growth here can come from a couple of places. Like any other tech company, if a particular service or product takes off, these small-cap stocks should, too. And given the idea that it's easier to double $1 million in revenues than $1 billion, they theoretically should have even more "pop" potential.
But also, because the average market capitalization of companies in this fund is just under $2 billion, many of these businesses are priced right to be acquired by tech's mega-caps, who sometimes look to grow through mergers. Thus, big buyout premiums can also drive this ETF higher.
iShares PHLX Semiconductor ETF
Market value: $1.6 billion
Dividend yield: 1.3%
When people think about semiconductors, or "chips," their minds typically first go to things such as CPUs and GPUs that power processes and graphics in computers, tablets and smartphones.
But they have myriad more uses, for both simpler and grander purposes.
Semiconductor chips have a myriad of applications, and are found in just about anything, from AC/DC power sources and dishwashers to satellite transponders and ultrasound scanners. They're also the very thing that will support the growing "Internet of Things" - the digital connectivity of everyday objects such as refrigerators and alarm clocks.
The iShares PHLX Semiconductor ETF (SOXX, $183.34) is the largest fund dedicated to semiconductor stocks, and holds a concentrated portfolio of 30 top industry names. That naturally includes Intel (INTC), the dominant provider of PC chips, as well as Nvidia (NVDA), the hot-running graphics specialist that is expanding into artificial intelligence and autonomous driving. But it also includes Texas Instruments (TXN), whose analog chips are far simpler but have their own multitude of uses in consumer products and industrial systems. Tops at the moment is an 8.9% weighting in Broadcom (AVGO), whose products will help support phone manufacturers' shift to 5G technology.
SOXX has a modified weighting system, so assets invested in each stock aren't perfectly proportional to their market capitalization. However, larger companies still have an outsize pull on the fund, with AVGO, TXN, INTC and NVDA all commanding 7%-plus weights at the moment.
First Trust Dow Jones Internet Index Fund
Market value: $8.2 billion
Dividend yield: 0.0%
The internet has stretched into nearly every facet of the human experience, from raising children to our social connections to how we purchase things to how we work.
That makes the First Trust Dow Jones Internet Index Fund (FDN, $137.13) - a concentrated portfolio of 41 U.S. companies that generate at least 50% of their annual revenues from the internet - a naturally attractive play.
The top holdings are a who's who of sites you visit every day, or whose apps you regularly use. They're also fountains of potential growth.
- Amazon.com is the world's largest e-commerce company, but it's also America's largest cloud-services provider, and its Echo smart-speaker products are making it a likely candidate to dominate the smart home.
- Facebook is the world's largest social media site, boasting 2.3 billion monthly active users worldwide on its core site alone, not to mention properties WhatsApp (1.5 billion MAUs) and Instagram (1 billion MAUs) - and it's leveraging the data it's collecting on all those users to better target ads to them.
- Netflix is a titan of streaming video, boasting 139 million paying subscribers in the U.S. and abroad.
In short, FDN provides exposure to the growth of America's internet behemoths, though its market-cap weighting methodology ensures the largest companies will have the most say in its performance.
Global X FinTech ETF
Market value: $299.50 million
Dividend yield: 0.0%
One area of the world that's changing rapidly thanks to technology is the financial services center, where long lines at the bank are being replaced with camera-enabled deposits and non-bank financial accounts.
Enter the Global X FinTech ETF (FINX, $26.52), which holds a small bundle of 37 holdings involved in the technological advancement of finance.
FINX carries a few names you'd immediately expect off the top of your head, such as relative newcomers like PayPal (PYPL) - one of the first online payments systems that now is worth $20 billion more than American Express (AXP) by market value - and Square (SQ), whose point-of-sale systems blossomed among small businesses. There also are old-guard companies such as credit card processor First Data Corp (FDC), and other innovators in the space including TurboTax parent Intuit (INTU) and Swiss financial-software company Tenemos Group.
As Americans and the rest of the world increasingly take their finances online, FINX - which has rebounded by almost 20% so far in 2019 - should continue to thrive.
Global X Internet of Things ETF
Market value: $73.9 million
Dividend yield: 1.1%
Another Global X "thematic" offering - rather than broad-sector or even industry-specific funds, these ETFs are designed to chase certain economic, technological and other trends - is the Global X Internet of Things ETF (SNSR, $18.72).
IoT, as mentioned before, encompasses so-called "smart" devices that use a range of sensors, software and internet connection to better serve an owner's needs. This technology is being applied in a wide variety of ways, from smartwatches that analyze your physical activities, to thermostats that learn your schedule and adjust temperatures accordingly, to speakers such as Amazon's Echo that can provide information, play music and perform other tasks in response to the human voice.
It's an enormous market. Ericsson predicts that by 2022, 29 billion connected devices will be in use worldwide - surpassing $1 trillion in market size by that point, IDC forecasts. This will be fueled by thousands of companies producing IoT devices, however, making picking winners and losers in the device field itself difficult.
SNSR takes a different approach. Instead of merely targeting companies putting out smart speakers or smart refrigerators, this ETF instead invests in companies throughout the chain - semiconductor firms such as STMicroelectronics (STM) that produce chips for smart driving and other applications, and Sensata Technologies (ST), whose sensors help IoT devices function.
In theory, investing in the back-end companies that power many device creators should yield a higher probability of success than trying to guess whose smart speaker will come out on top.
Robo Global Robotics and Automation Index ETF
Market value: $1.4 billion
Dividend yield: 0.3%
The Robo Global Robotics and Automation Index ETF (ROBO, $38.72) covers a few areas of the market that are full of potential. As we mentioned in our look at the best ETFs for 2019:
"Technavio expects the global robotics market to more than double from $32 billion in 2017 to more than $77 billion in 2022. Mordor Intelligence projects a compound annual growth rate of 24.52% in the global robotics market between 2018 and 2023. Zion Market Research sees the global automation market hitting $321.9 billion by 2024 - up from $2017.2 billion in 2017."
ROBO, like other thematic ETFs, is not necessarily a pure play on a single sector. And that's a good thing, says William Studebaker, President and CIO of ROBO provider ROBO Global.
"Where is robotics being deployed? Healthcare, ag, food, consumer, industrial manufacturing, just to name a few. If you're exposed to any one sector, you'd pose yourself potentially big risks if that sector came under pressure," he says. "But I think investors are becoming more bullish on the future of (technologies such as) shared mobility and autonomous vehicles."
Indeed, technology makes up half of the fund's holdings - FLIR Systems (FLIR), for instance, produces things such as thermal imaging cameras and imaging sensors that help power automated systems. But there also are healthcare companies such as Intuitive Surgical (ISRG), whose da Vinci Surgical System uses robotics to perform minimally invasive surgery, and Japanese industrial company FANUC (FANUY), which is a leader in robotics.
Also note that ROBO has a modified cap-weighting system that significantly cuts down on single-stock risk; FLIR is the top holding at just 1.83% of assets.
ARK Web x.0 ETF
Market value: $492.6 million
Dividend yield: 1.2%
The ARK Web x.0 ETF (ARKW, $45.22) is an actively managed ETF that is loosely based around cloud computing technology, but it's far from just a collection of cloud providers.
ARKW holds companies that "are focused on and expected to benefit from shifting the bases of technology infrastructure to the cloud," so that includes companies that offer cloud platforms and/or storage, but also companies that use and can otherwise benefit from the expansion of the cloud.
The result is a much more wide-ranging portfolio that includes themes such as big data, the Internet of Things (IoT) and machine learning. So while you get companies such as Amazon, whose Amazon Web Services is the world's largest cloud services provider, you also get electric-vehicle and autonomous-vehicle innovator Tesla (TSLA), as well as chipmaker Nvidia, which is working with automakers such as Audi and Toyota (TM) to develop driverless car technology. You also get online lending exchange LendingTree (TREE) and genome diagnostics company Veracyte (VCYT), among other holdings.
ARKW also is exposed to blockchain - the virtual transaction ledgers that serve as the basis for cryptocurrencies such as Bitcoin - though not quite the way it used to be. Its holding in the Bitcoin-tracking Grayscale Bitcoin Trust (GBTC) has shrunk down to a less than 1% weight thanks in large part to the cryptocurrency's declines. Though it does hold other companies with blockchain exposure, such as Nvidia.
KraneShares CSI China Internet ETF
Market value: $1.9 billion
Dividend yield: 0.03%
The U.S. is far from the only hub of technology giants across the world. We might have the FANGs (Facebook, Amazon, Netflix and Google parent Alphabet). But look over to China, and you'll find similar technological superpower in the BAITs: Search engine giant Baidu (BIDU), e-commerce titan Alibaba (BABA), streaming company iQiyi (IQ) and sprawling internet and gaming presence Tencent (TCEHY).
These stocks all feature prominently in the KraneShares CSI China Internet ETF (KWEB, $44.46). And they all - as well as KWEB - took a licking as their high valuations crashed against a wall of bearishness on Chinese equities as a whole amid domestic growth concerns and tariff disputes with the U.S.
But the rebound potential is just as strong, as evidenced by KWEB's 20% run in 2019. Still, a growing Chinese middle class and internet expansion help the bull case.
For instance, Chinese internet users have nearly doubled since 2009, to 800 million people - only 58% of the population, which is far from saturated. Moreover, Cisco forecasts a compound annual growth rate of 26% for the country's internet traffic through 2020.
KraneShares' ETF is one of the most direct ways to capture this potential, investing in the BAITs along with another roughly 50 holdings such as after-school tutoring specialist TAL Education Group (TAL) and online travel site Ctrip.com International (CTRP).
Amplify International Online Retail ETF
Market value: $2.5 million
Dividend yield: N/A
The growth of online retail is plenty apparent in the U.S., whether you're an Amazon/Ebay/Overstock customer, or whether you've just noticed the glut of abandoned physical retail spaces in your local mall.
But take a gander across your nearest ocean, and you'll see that e-commerce is even hotter overseas.
"North America last year grew 16% in e-commerce sales," says Christian Magoon, founder and CEO of Amplify ETFs. "But if you look at Asia Pacific, they grew 30%, if you look at central and eastern Europe, they grew over 20%, if you look at Middle East/Africa, they grew over 20%."
The Amplify International Online Retail ETF (XBUY, $25.52) is a very, very new fund launched on Jan. 30, 2019, that hopes to capture the growth of e-commerce not just in exciting emerging markets, but also in developed markets such as Europe, which tend to get overlooked by some investors because of their slower overall growth rates.
China is still the top weighting at 27%, led by VIP.com operator Vipshop (VIPS) and iQiyi. But there also are substantial holdings in developed markets such as Japan (23%), the U.K. (16%) and Germany (10%), as well as smaller holdings in countries such as Argentina, India and even Canada.
This is also a fairly balanced fund, with the largest of the 46 holdings - ASOS (ASOMY), a British online fashion retailer - at just 3.3% of assets.
"XBUY presents a compelling opportunity for investors to capitalize on this international growth, a segment where 80% of total online retail sales in 2018 were from countries outside the U.S.," Magoon wrote in the launch release.
VanEck Vectors Video Gaming and eSports ETF
Market value: $10.1 million
Dividend yield: N/A
Video gaming has gone from a niche interest in its early years to a worldwide global phenomenon that has literally hundreds of millions of participants - yet there's still a "next step." That's "eSports" - competitive gaming. And it's serious business, with gamers vying for substantial cash prizes while playing in arenas in front of live fans, as well as in front of cameras broadcasting these events to millions of fans.
There's even a platform, Twitch, that lets viewers watch other people game from home - Deloitte insights points out that "in just one week in June 2018, viewers on Twitch spent 17.7 million hours watching players compete in League of Legends matches." Amazon is harnessing Twitch now thanks to a $970 million buyout in 2014. And gaming research firm Newzoo estimates that eSports revenues will eclipse $1.1 billion this year - up from $865.1 million last year - and eventually hit $1.8 billion by 2022.
The VanEck Vectors Video Gaming and eSports ETF (ESPO, $29.10) is a tight portfolio of 25 gaming-focused stocks such as China's Tencent, America's Activision Blizzard (ATVI) and Japan's Nintendo (NTDOY). But also included are a few companies that would also benefit from growth in gaming, such as chipmakers Nvidia and Advanced Micro Devices (AMD).
This is another young fund that only got its start in July 2018, but it looks increasingly promising as gaming grows and more real cash is thrown at eSports.
Fidelity MSCI Telecommunication Services Index ETF
Market value: $303.4 million
Dividend yield: 2.5%
Our last fund is absolutely, 100% not a tech fund, if you ask GICS. But if you're looking to invest in the likes of Facebook and Alphabet, as well as a host of other companies that either used to be "technology" and/or still could be considered technology, the place to find them is the Fidelity MSCI Telecommunication Services Index ETF (FCOM, $31.80).
The FCOM - like VGT, a much different fund than it once was - used to be a telecom-heavy ETF where Verizon (VZ) and AT&T (T) enjoyed 20%-plus weightings. In turn, the fund was a surprisingly good yielder whose annual dole typically sat around 3% and dwarfed most other sector funds - even the First Trust Nasdaq Technology Dividend ETF (TDIV).
It still does yield better than the TDIV, by the way, at 2.5% to 2.3%, but it's now more of a growth-and-income hybrid than a pure yield play.
Alphabet and Facebook make up well more than a third of the fund's assets, while Netflix is another 6% of the fund. Verizon and AT&T are now relegated to roughly 13% of the ETF's weight between them. Media and TV companies are part of the fray, too, so FCOM includes the likes of Disney (DIS), Comcast (CMCSA) and 21st Century Fox (FOXA) as well.
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Copyright 2019 The Kiplinger Washington Editors