Nothing quiets the hype over the latest breakthroughs in gadgets, computers and the Internet like a tour through the landscape of tech sector investing options for Canadians.
After making itself look silly by diving too deeply into tech a decade ago, the mutual fund industry has trimmed back its offerings in the sector to roughly 50 products from 400 or so back in 2001. If you screen out spin-off versions of the same fund, you're left with maybe a dozen and a half names. Okay, you might think, new exchange-traded funds are popping up all the time, and many of them are aimed directly at investors who want exposure to a particular sector. What about a tech ETF?
While there are dozens of technology-focused ETFs listed in the U.S. market, there are just two to be found on the Toronto Stock Exchange. Neither is a slam-dunk choice over the best U.S.-listed ETFs, but let's assume for the moment that you want to buy domestically to avoid the extortionate currency exchange rates charged by brokerage firms.
Your first choice is the well-established but not especially appealing iShares Technology Sector Index Fund . The knock on this ETF is the index it tracks - the S&P/TSX capped information technology index. The Canadian stock market may be strong on resources and financials, but when it comes to technology it's a backwater. The S&P/TSX capped information technology index has all of five constituent companies - CGI Group, Research In Motion, Open Text Corp., Celestica and MacDonald Dettwiler & Associates. If you buy this ETF, then, you'll have absolutely no exposure to big U.S. names like Google, Cisco and Apple. A better idea: find another tech ETF and, if you like the stocks in the iShares tech ETF, buy them directly.
The other TSX-listed tech ETF is the new BMO Nasdaq 100 Equity Hedged to CAD Index ETF , which is best described as a Canadianized version of the famous PowerShares QQQ . This PowerShares fund recently marked its 10th anniversary and is often among the most heavily traded ETFs on the U.S. market.
There are a couple of reasons to like ZQQ, one being that its 0.35-per-cent management expense ratio undercuts XIT's MER of 0.55 per cent. Another is that you get the benefit of currency hedging, which means you'll get the returns of the underlying Nasdaq-100 index without distortions caused by the ups and downs of the Canadian dollar versus the U.S. dollar.
The drawback of ZQQ is, again, related to the index it tracks. The Nasdaq-100 is made up of the largest non-financial companies listed on the Nasdaq, including Apple, Cisco, Google and RIM. But there are several tech giants that aren't listed on Nasdaq and thus aren't included in this ETF. Examples include IBM and Hewlett-Packard.
Trading volumes suggest that ZQQ is gaining a healthy degree of market acceptance from investors. XIT has an edge in terms of daily trading, but ZQQ is close behind and seems likely to become the Canadian investor's favourite domestic tech ETF.
Investors who are willing to put up with the annoyances of a U.S.-listed ETF - currency exchange fees plus exposure to currency fluctuations - have a couple of very good options to look at. One is the Technology Select Sector SPDR , which includes tech stocks in the S&P 500 and has an MER of 0.21 per cent. Another is the Vanguard Information Technology ETF , which tracks the MSCI U.S. Investable Market Information Technology Index. There are about 400 stocks in this ETF, compared to 75 in XLK, and the MER is 0.25 per cent. Note that neither of these two U.S.-listed ETFs includes RIM among its holdings, whereas the new BMO tech ETF does. It's not perfect for Canadian investors targeting tech, but this new BMO product is probably the best all-around choice.