Technology stocks have surged over the past year, but the sector bears little resemblance to the speculative 1990s dot-com era.
Larger companies flush with cash now pay dividends. Growth also comes from smartphones, cloud computing and robotics rather than the personal computers and hardware of the past. And exchange-traded funds (ETFs) have become more innovative, letting investors bet on tech niches instead of just the sector.
With the recent market pullback now offering a better entry point, we asked three ETF watchers for their top picks.
Daniel Straus, ETF analyst at National Bank Financial Inc.
The pick: Horizons Robotics and Automation ETF (ROBO)
This ETF invests in the growing robotics and automation industry, whose products and services help firms boost productivity and increase efficiency, says Mr. Straus. Their technologies are used in everything from search-and-rescue operations to farming, surgery and warehouse logistics, he says.
The global equity ETF tracks 84 firms and hedges its U.S.-dollar exposure back to Canadian dollars. iRobot Corp. and Daifuku Co. Ltd. are among the top holdings. A downturn in global manufacturing, or a general economic slowdown in emerging markets that could cause demand for these technologies to decline, is a risk to this ETF, he said. Launched last fall, the ETF is expected to charge about an 0.85-per-cent fee, he says.
The pick: First Trust Dow Jones Internet ETF (FDN)
This fund is a play on Web-based companies that are still a huge driver of future economic growth, says Mr. Straus. The ETF, launched in 2006, has exposure to the so-called "FANG" Internet stocks. Facebook Inc., Amazon.com Inc., Netflix Inc. and Alphabet Inc. (formerly Google Inc.) make up 33 per cent of the 40-stock portfolio.
The ETF gained about 37 per cent last year compared with 22 per cent for the S&P 500 Index. Because the FANG stocks have driven "incredible performance for the ETF and the market," a major pullback among these heavily weighted names would hurt fund performance, he notes. The fund's 0.54-per-cent fee is slightly cheaper than peers focused on this niche, he adds.
David Kletz, ETF analyst and portfolio manager, Forstrong Global Asset Management Inc.
The pick: ETFMG Prime Cyber Security ETF (HACK)
This ETF, which gives exposure to the Internet security industry, should benefit from companies and governments increasing budgets to defend against potential damage caused by cyber attacks, says Mr. Kletz. "Brand reputation is at stake as customer information has become a predominant target."
The ETF tracks 45 cyber-security firms, including Science Applications International Corp. and Cisco Systems Inc. Because this industry tends to be "highly cyclical" as system upgrades can be affected by cost-cutting during economic downturns, that is a risk to the ETF, he notes. The fund's 0.60-per-cent fee is competitive versus other niche tech offerings, he says.
The pick: iShares Exponential Technologies ETF (XT)
This fund is a diversified play on technologies that are highly innovative and potentially disruptive to traditional businesses, says Mr. Kletz. The ETF invests in nine themes globally, including big data analytics, robotics and 3-D printing. Top holdings include Bioverative Inc., Netflix Inc. and Tesla Inc.
The fund, which charges a 0.47-per-cent fee, is "one of the more affordably priced ETFs focusing on niche technologies," he notes.
Because of the progressive nature of the ETF's holdings, there are risks, he says. As technology is a fast-moving space, rapid obsolescence can make it difficult for firms to monetize their ideas, while more spending on research and development could hurt profitability, he adds.
Denise Davids, ETF and mutual fund analyst at Industrial Alliance Securities Inc.
The pick: VanEck Vectors Semiconductor ETF (SMH)
This ETF focuses on the semiconductor industry, which is driving the proliferation in consumer electronics, says Ms. Davids. Semiconductors, which are materials that have electrical conductivity, can be found in everything from smartphones to computers. The auto industry, however, also relies on semiconductors to enhance fuel efficiency and safety, and the materials play a key role in self-driving vehicles, she adds.
The fund holds 25 stocks, including Intel Corp., Taiwan Semiconductor Manufacturing Co. Ltd. and Nvidia Corp. The lack of diversification in this ETF is a risk should the tech sector suffer a downturn, she cautions.
The ETF's 0.35-per-cent fee is attractive relative to its peers, she says.
The pick: Global X Robotics and Artificial Intelligence ETF (BOTZ)
This ETF gives exposure to the high-growth potential of the robotics and artificial intelligence industries, says Ms. Davids. "These areas have become increasingly attractive to companies looking to innovate, lower costs and enhance efficiencies."
This global equity ETF is half invested in Japan and 27 per cent in the United States. Holdings include Yaskawa Electric Corp., Nvidia Corp. and Fanuc Corp.
While this fund can offer strong upside potential – it returned 58 per cent last year – there is risk from its highly concentrated approach, she said. The fund invests in only 29 companies.
This ETF charges a 0.68-per-cent fee that is "not unreasonable given the niche market that it plays in," she said.
Largest tech ETF trades near its record high
The world's largest technology exchange-traded fund (ETF) recently clawed its way back to its record high from 18 years ago.
The U.S.-listed Technology Select Sector SPDR ETF (XLK) last month climbed past its March, 2000, peak of US$65.44 a unit reached just before the dot-com bubble burst.
The ETF, which rose to nearly US$70 a unit before the recent market downturn, now trades slightly below its former peak.
This fund, which has more than US$19-billion in assets, tracks an index of 71 tech stocks in the S&P 500. Last year, it gained a robust 34 per cent, outpacing the broader market's 22-per-cent return. It was also the best annual performance in a decade for the fund, which charges a 0.13-per-cent fee.
Launched in 1998, the ETF's top holdings include Apple Corp., Microsoft Corp., Facebook Inc. and Alphabet Inc. But investors hoping to cash in on Amazon.com and Netflix Inc.'s growth stories won't find these two iconic names in XLK.
It may come as a surprise to some investors since the two firms make up the top-performing FANG quartet of Internet stocks (along with Facebook Inc. and Google parent Alphabet Inc.). Instead, Amazon and Netflix can be found in the Consumer Discretionary Select Sector SPDR ETF or elsewhere, including a niche technology ETF. It pays to look under the hood.