How to gain cheap access to technology stocks, from large to small cap, with different regional and thematic focuses.
Technology stocks have been one of the key driving forces behind the global equity bull market over recent years. In fact globally, the technology sector has trounced all other sectors over the past three and five years. Even as tech stocks like Facebook, Apple and Alphabet (Google) tower over the US equity markets, the opportunities in emerging fields such as artificial intelligence and big data appear never to have been higher.
One of the key benefits of ETFs is that they allow low-cost, efficient exposure to targeted markets and sectors. Technology is no different. Investors can overweight tech stocks by adding a capitalisation-weighted sector ETF to their portfolio.
Broad market options
The most comprehensive of these is the X-trackers MSCI World Information Tech ETF (XDWT), which selects large- and mid-cap technology stocks in developed markets globally, for an ongoing charge of 0.3 per cent. Japan, Germany and the Netherlands account for 10 per cent of country exposure, but they are dwarfed by the US, which claims 85 per cent of index weight.
Given the huge global influence wielded by the American tech firms, investors may be content to limit themselves to US tech stocks for a lower fee. For example, the popular iShares S&P 500 Info Tech Sect ETF $ Acc (IUIT) tracks all 72 technology stocks in the S&P 500 index for an ongoing charge of just 0.15 per cent. As with the X-trackers fund, it is populated by the US tech giants such as Microsoft and Apple.
Geographically, investors with a preference for Europe can plump for the synthetically replicated X-trackers Stoxx Europe 600 Tech Swap ETF (XS8R), which at the time of writing holds 28 companies. This narrower ETF has significant single-stock risk, with German software giant SAP taking a quarter of fund size.
For many investors, sector ETFs don’t get granular enough. For them, a new breed of ETFs has arrived. These funds seek to capture a specific technological theme rather than a broad sector, and usually fish further down the market cap spectrum when selecting holdings.
For example, the ETF Securities ISE Cyber Security GO ETF (USPY) only buys stocks that either consult on or develop products related to cyber security. The fund has proved to be popular despite an eyebrow-raising ongoing charge of 0.75 per cent. It shares a third of holdings – mostly global players such as Cisco Systems – with the broad X-trackers MSCI World Information Tech ETF mentioned above. Importantly, it also has over 40 per cent of fund exposure to smaller less-known stocks such as Mimecast, a London-based email security specialist.
Attempting to profit from a transition to a digital world is the iShares Digitalisation ETF USD Acc (DGTL). It invests in companies that derive most of their revenues from digitalisation business in developed and emerging countries. Tracked stocks include household names like Twitter and Netflix, but also smaller firms such as Zillow, a US-based real-estate data firm launched by the founders of Expedia.
Again, the fund has significant overlap with broader tech sector ETFs but also includes smaller niche holdings such as Japanese mobile portal and e-commerce website provider DeNA, which set it apart. With more than 100 holdings, the fund is broader than other thematic offerings. The methodology ensures that it retains a strong small-cap tilt.
It is important to note that due to the narrow exposure offered, all of the ETFs mentioned above are best deployed tactically within a wider portfolio.