One sector that has rewarded investors with higher returns than the market averages is the technology sector. Once a technology company becomes large enough, it will work to expand its reach globally and, eventually, pay out a dividend. The best way to get exposure to the technology sector is by investing in exchange-traded funds (ETF).
Below is info on my picks for the best technology ETFs for 2017. These include investment opportunities that are focused on the Internet, medical technology, and small-cap technology companies. But first, I will explain the benefits of investing in technology ETFs.
Why Consider Technology ETFs?
1. Income Opportunities
There are many technology companies that do not pay out a dividend to investors because reinvesting back in the business would generate a higher return on investment. As a result, these would benefit investors’ bottom lines more than a dividend. A company such as this, with the right execution plan, would outperform the market return, which would be gradually reflected in the stock price. However, many investors would not even consider these businesses since there is no dividend.
By owning a technology ETF, you get the best of both worlds. There are multiple positions held within a single ETF, some of which pay out a dividend, while others are non-dividend-paying growth companies with their own benefits. And there is always the chance that those companies that don’t currently pay a dividend will begin to one day.
2. No Lost Opportunities
It is hard to determine who the leader would be in a particular segment of the technology sector. For example, 20 years ago, a company such as Wal-Mart Stores Inc (NYSE:WMT) would be the leader in the retail segment. But today is a different story, thanks to the Internet, with Amazon.com, Inc. (NASDAQ:AMZN) now on top. Amazon is nearly double the size of Wal-Mart, based on their market caps.
Amazon’s dominance is something not many people believed would happen. I mention this as an example of how no one knows when the next huge technology company is going to emerge. But by owning a technology ETF, you hold many positions, lowering the probability of missing out on an opportunity and removing the guessing aspect.
Technology ETFs List
|Technology Select Sector SPDR Fund
|PowerShares Dynamic Technology Sector ETF
|PowerShares S&P SmallCap Information Technology Portfolio
|iShares U.S. Medical Devices ETF
|First Trust Dow Jones Internet Index Fund
1. Technology Select Sector SPDR Fund
Technology Select Sector SPDR Fund (NYSEARCA:XLK) seeks to track the price and yield results of the stocks that are within the Technology Select Sector Index. XLK attempts to own the same percentage of the securities as they are represented in the index. At least 95% of the total assets are invested in securities that make up the underlying index.
There are more than 70 companies within XLK, which provide diversification and exposure to the technology sector. The dividend is received on a quarterly basis.
When investing in any asset, its future growth is important. The best means of predicting this growth is by looking at the earnings history of the companies within the ETF. In the case of XLK, the estimated earnings growth for its holdings is north of 10%, which should eventually reflect in income and affect the stock price positively. This, in turn, should cause the ETF to trade higher. (Source: “Technology Select Sector SPDR Fund,” State Street Global Advisors SPDR, last accessed May 31, 2017.)
The last reason to consider XLK is its holdings, which consists of stocks that both do and don’t pay a dividend, with companies that do including Apple Inc. (NASDAQ:AAPL) and Microsoft Corporation (NASDAQ:MSFT). The companies that don’t have a dividend often get ignored by investors, but these businesses have some of the highest growth rates. Non-dividend-payers include Facebook, Inc. (NASDAQ:FB) and Alphabet Inc (NASDAQ:GOOG). Note that these companies are some of the largest based on their market cap.
2. PowerShares Dynamic Technology Sector ETF
PowerShares Dynamic Tech Sec (ETF) (NASDAQ:PTF) invests at least 90% of its total capital in companies that make up the underlying index. The ETF uses the Dorsey Wright Technology Technical Leaders Index, attempting to copy its price movement and yield.
This is a very unique investment opportunity because it offers both a steady income and growth opportunities. At least 30 different companies are invested at one time and the income is paid as a dividend on a quarterly basis.
PTF’s growth comes from the stock price appreciation of its investments. The focus is on companies that have a high probability of seeing their price move higher. Said stocks are determined using chart-based technical analysis. If a company was owned and it was believed that its stock price would fall, then the stock would be removed from the fund. The opposite would occur as well; a stock with a high possibility of going higher could be added. This is an active ETF strategy that seeks to ensure that only the best stocks are owned.
More active funds typically charge a higher management expense ratio (MER), but this is not the case for PTF. Instead, the MER fee, at 0.6%, is very low for an active fund. These fees go towards commission costs for trading, management’s salaries, regulatory fees, and more. But no matter what, investors remain the biggest beneficiaries.
3. PowerShares S&P SmallCap Information Technology Portfolio
PowerShares S&P SmlCp Inftn Thgy Pfo (NASDAQ:PSCT) tracks the price and yield movement of the S&P SmallCap 600 Capped Information Technology Index. This index is made up of companies that are focused on information technology-related products and services, electronics and semiconductors, computer hardware and software companies, Internet exposure, and communication technologies. The fund invests at least 90% of total capital in stocks that are part of the index, while the remainder is in cash or cash equivalents.
Here is why this small cap technology ETF should be considered for an investment.
Investing in small-cap technology ETFs is very difficult because technology changes very frequently and the future is unknown. In addition, a small-cap company around today could just as easily be gone tomorrow–and with it, the invested capital. Lastly, many small-cap businesses do not pay a dividend, retaining their earnings to reinvest back into the company.
By owning PSCT ETF, all these worries disappear. Professionals familiar with the companies and their business models make the investment decisions, focusing solely on only the best small-cap companies for PSCT. They will often even meet with the executives of these companies to ensure that they are working in the best interests of shareholders.
As for the company still existing tomorrow, an ownership stake in PSCT gives you access to more than 80 companies. So if one company, say, went bankrupt, there are many other holdings that would offset the loss. This reduces the risk, which is an important factor when investing.
The last reason to consider owning PSCT comes down to the need for income. While not every holding pays a dividend, the you will still receive one from those that do. And remember, as noted, those that don’t currently pay a dividend won’t necessarily stay that way.
4. iShares U.S. Medical Devices ETF
iShares Dow Jones US Medical Dev.(ETF) (NYSEARCA:IHI) is a medical technology ETF that attempts to track the performance of the Dow Jones U.S. Select Medical Equipment Index. The index is made up of U.S. equities in medical device companies, particularly distributors of the likes of x-ray machines, pacemakers, scanners, and prosthetics. At a minimum $9.00 out of every $10.00 within the fund is invested in the securities that make the index and are used as a tracking metric.
Even though IHI is focused on investing in medical device companies, the fund is diversified. There are more than 40 different companies within, and one position does not represent more than 12% of the total capital. Another form of the diversification is the way that revenue is generated globally, so if one region sees a sales slowdown, another could pick up the slack—a key benefit of owning a medical technology ETF.
The top three holdings are Medtronic plc (NYSE:MDT), Abbott Laboratories (NYSE:ABT) and Thermo Fisher Scientific Inc. (NYSE:TMO).
IHI also pays a growing quarterly dividend to investors. One reason for this is because of the growth in the stocks held. Abbott Laboratories, for instance, has increased its dividend for 44 straight years, leading to a higher payout for unitholders.
5. First Trust Dow Jones Internet Index Fund
First Trust DJ Internet Index Fund (ETF) (NYSEARCE:FDN) owns securities that are part of the Dow Jones Internet Composite Index. These companies generate at least 50% of their revenue from either Internet services or e-commerce. FDN has the ability to generate excess returns over the index because borrowing is allowed within the fund. This means that money is borrowed against the capital within the fund.
FDN is one of the best global technology ETFs because the fund is diversified among different sectors. The top three sectors in terms of representation are the technology, consumer cyclical, and financial services sectors. The companies generate revenue worldwide and include salesforce.com,inc. (NYSE:CRM), Netflix, Inc. (NASDAQ:NFLX), and Paypal Holdings Inc (NASDAQ:PYPL).
This is the only ETF on this list that does not pay out a dividend. Even though some of the holdings do, there is always a possibility of this changing in the future. In the meantime, the income earned is reflected in the stock price.