Millions – soon to be billions – of people use Facebook as their only communication tool with friends. Suddenly, information technology is not just big, it’s game-changing.
And yet, the sector has frustratingly never been an easy place to plunk one’s dollars and watch them grow from megabytes to terabytes. Companies such as Apple and Google have rewarded investors handsomely; Global Crossing and 360networks have, on the other hand, failed spectacularly. For every bright star, it seems, there’s a black hole.
Even the sector’s most successful companies encounter incredibly rough patches. Intel recently announced it will spend up to $700-million to correct a design flaw in a new chip. So, while there is clearly money to be made, how to do you invest in tech without losing your virtual shirt?
Technology exchange-traded funds (ETFs) are an attractive, low cost alternative to tech stocks. They invest in a basket of tech stocks that are part of a benchmark index. The objective is to provide investors with the returns of the stocks in the index minus fund expenses. Two Canadian- and several U.S.-listed ETFs are based on benchmark indices that are heavily weighted with technology companies.
The iShares S&P/TSX Capped Information Technology Index Fund XIT-T is the only ETF that tracks Toronto Stock Exchange-listed companies in the information technology sector. It’s based on the S&P/TSX Capped Information Technology Index. The fund holds just five companies – CGI Group Inc., Research in Motion Ltd., Open Text Corp., MacDonald Dettwiler and Associates and Celestica Inc. The management expense ratio is 0.55 per cent. It has not paid a distribution since December, 2008. This ETF has tracked its benchmark index closely; however, returns have been low compared with other tech ETFs.
The Canadian stock market is notoriously short of technology companies. Consequently, XIT is a poor representation of the many companies around the world involved in this rapidly growing sector. Investors need to look to ETFs that invest internationally for more diversified exposure.
The BMO NASDAQ 100 Equity Hedged to CAD Index ETF ZQQ-T is likely the better choice of the two Canadian-listed technology-rich ETFs, experts say. This fund seeks to track the performance of 100 of the largest non-financial securities (based on market capitalization) listed on the NASDAQ stock exchange.
While it’s not exclusively a technology fund, 65 per cent of the holdings are in this sector. All the big name U.S. information technology companies are represented including Apple Inc., Google Inc. Class A, Microsoft Corp., Oracle Corp., Amazon.com Inc., Cisco Systems Inc. and Intel Corp. There is even a smattering of U.S.-listed foreign stocks such as Canada’s Research in Motion and Baidu Inc. ADR, the Chinese-language Internet search provider. The management expense ratio is estimated at 0.37 per cent. It pays a small yield of about 0.60 per cent, distributed annually.
ZQQ was launched in January of 2010, so it lacks a performance track record. Still, Canadian investors should take a look, given that it tracks a well established benchmark and the impact of currency exchange rates is removed by hedging to the Canadian dollar.
A large selection of technology ETFs is listed on U.S. stock exchanges. Unlike American mutual funds, U.S.-listed ETFs can be purchased by Canadian investors. The procedure is the same as buying a U.S.-listed stock. Note that currency exchange fees will be charged when you convert Canadian dollars to make the purchase and these ETFs are subject to exchange rate fluctuations.
