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5 Dirt-Cheap Tech ETFs for Further Gains

Sanghamitra Saha
Sector ETF report for PSJ

Be it trade war fear or rising rate concern; nothing has overshadowed the tech rally this year. The tech-heavy-Nasdaq 100 is hovering around its record high, adding about 13% this year (as of Jul 16, 2018) compared with only 3.8% gains for the S&P 500 index.

The sector has been on stronger ground on the corporate earnings front. Second-quarter earnings for the sector are expected to be up 23.8% on 10.7% higher revenues, per Earnings Trends issued on Jul 11. Rising enterprise spending, the tailwind of tax cuts and emerging technologies like cloud computing, artificial intelligence and big data are the wind beneath the wings of the tech sector (see all technology ETFs here).

Investors should note that tech behemoths hoard huge cash overseas and are poised to benefit the most from Trump's repatriation tax policy. Also, investors can expect higher dividend distribution or share buyback from this move. Plus, a pickup in the global economy is great for a cyclical sector like technology. Such sectors perform better in a rising rate environment like what we are witnessing currently in the United States.

Are Overvaluation Concerns Rife?

After such a rally, overvaluation concerns are bound to crop up. Morningstar equity analysts feel the tech sector as slightly overvalued today, but not as much as the first quarter as global markets are less stretched now. Chris Harvey, head of equity strategy at Wells Fargo, has also started believing that “tech stocks may be nearing a peak.” The Leuthold Group is also worried about the swarming investments in "a very narrow number of popular names" like FAANG stocks (read: 5 Tech ETFs That Crushed FANG ETFs in 2017).

This may catch some investors off guard. But then, fundamentals behind the sector are rock solid. So, investors can definitely pick some tech ETFs that have the lowest expense ratio in the space and can thus reduce ones spending bill considerably.

Why to Focus on Low Expense Ratio?

Consider an expense ratio of 1%, a fund of $10,000 invested at 8% annual return will grow to $19,672 in 10 years, while the same fund invested at an expense ratio of 0.1% will grow by a higher amount of $21,390. The difference between the returns will zoom on increasing the holding period (read: Expenses Matter: Dive into 7 Low Cost ETFs).

Considering the same parameters, with an expense ratio of 0.1%, the fund of $10,000 will grow to $97,869 in 30 years (at the same 8% rate of return). The same fund will however grow to a much lesser value of $76,123 with an expense ratio of 1%.

There are more than 50 tech ETFs with expense ratio ranging from 0.8% to 0.88%. Below we choose five ETFs with the lowest fees.

Fidelity MSCI Information Technology Index ETF (FTEC)

The Zacks Rank #1 (Strong Buy) fund charges 8 bps in fees. The fund is up 13.9% this year (as of Jul 16, 2018).

Vanguard Information Technology ETF (VGT)

The Zacks Rank #1 fund charges 10 bps in fees. The fund is up 13.2% this year.

Technology Select Sector SPDR Fund (XLK)

The Zacks Rank #2 (Buy) fund charges 13 bps in fees. The fund is up 11.8% this year.

iShares Evolved U.S. Technology ETF (IETC)

The expense ratio of the fund is 0.18%. The product has gained about 13% in the year-to-date frame (as of Jul 16, 2018).

Invesco S&P SmallCap Information Technology ETF (PSCT)

The expense ratio of the fund is 0.29%. The Zacks Rank #2 fund has added about 10.7% in the year-to-date frame.

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SPDR-TECH SELS (XLK): ETF Research Reports
 
PWRSH-SP SC IT (PSCT): ETF Research Reports
 
FID-INFOTEC (FTEC): ETF Research Reports
 
VIPERS-INFO TEC (VGT): ETF Research Reports
 
ISHR-EUS TECH (IETC): ETF Research Reports
 
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