When new technology moves into our lives, most of us don’t even notice it at first. It’s like a spicy meal that seems mild enough, then about five bites in, you realize you’re in for some heat. But like that deliciously spicy dinner, the top tech ETFs drift under the radar, gradually becoming more noticeable as technology becomes more ubiquitous.
The nice thing about investing in the top tech ETFs, though, is that you can sample many of these delightful spices/companies while sitting with the potential to profit as you wait for your friends to discover the magic. Perhaps this isn’t the best analogy. The point is that it’s important to understand the characteristics of the best tech ETFs so you know what to look for.
Consider the volatility behind the top tech ETFs
ETFs can be volatile, and that volatility can increase when the index or sector they follow is also volatile. This is the case with tech ETFs because the technology sector is volatile in itself. In fact, the S&P Global has ranked the technology sector as the fourth most volatile sector. With technology continually changing and evolving, young promising companies may start strong but end up flaming out early.
The technology sector is also reasonably broad, dealing with both consumer-centric technology as well as business technology. The diversity ranges from computers and mobile phones to logistics and software as a service (SaaS).
Characteristics of the top tech ETFs
Some of the top tech stocks come from reputable, household brands. Google or Apple come to mind. These companies have strong brand recognition because of their industry prominence and ability to make profits, some even provide dividend payments to shareholders. Tech ETFs that invest in blue chip, dividend-paying technology companies are more reliable than tech ETFs composed of up-and-coming startups because they have proven their effectiveness in the market. This doesn’t mean that startup tech companies can’t make profits for growth investors, but they will have greater levels of risk associated with them.
Many of the top tech ETFs also include companies that have hidden value. This hidden value can come in the form of research and development, real estate, or brand recognition. Companies that frequently invest more money into themselves have a great potential to evolve their technology, improve upon existing products, or develop new ones in the process. These types of assets can then lead to bigger gains when the tech comes to market.
There are some qualities many investors look for when deciding on the ETFs they want to invest in. For example, take a look at the management expense ratio (MER) of the ETF. Traditional ETFs have a much lower MER than the expense ratio of standard mutual funds. This is because traditional ETFs are passively managed as opposed to mutual funds, which are actively managed. A lower MER than other comparable funds is one trait to consider.
Passively-managed ETFs with lower MERs will tend to have lower costs because stock turnover is typically lower.
ETF investors should also consider if the ETF they are interested in pays capital gains historically. If so, the investor will need a strategy for handling the capital gains distributions.
Keep top tech ETFs in mind for growth potential, but be aware of the volatility behind the fund. Tech ETFs investing in prominent and profitable brands can lead to more stable growth over more extended periods.
What kind of technology companies do you target in your ETF investing?