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Time to buy beaten-up tech? Six ETFs to consider

Like a two-year-old smartphone, the tech sector seems to have lost some of its shine.

Technology stocks – led by Facebook Inc., Apple Inc., Amazon Inc., Netflix Inc. and Google (Alphabet) Inc., also known as the FAANG stocks – have led the bull market that hit record highs following the election of President Donald Trump.

Yet these titans have acted as a drag on the markets in recent weeks. Partly to blame is Mr. Trump, who has accused Amazon of exploiting the United States Postal Service. The administration’s burgeoning trade war with China hasn’t helped either, as each country’s tech sector is dependent on the other.

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Yet tech isn’t entirely radioactive, says David Kletz, a portfolio manager with Forstrong Global Asset Management in Toronto.

Amazon and other tech companies have been roughed up by the stock market in recent weeks.

MIKE SEGAR/Reuters

“Given the sector’s prominence in global equity indices, it is understandable the recent tech sell-off has rattled investors,” he says. “However, technology provides a critical offset to aging demographics and weak productivity growth.”

Other sectors increasingly rely on technology and automation, he points out, so even “if market leadership rotates away from the tech sector,” investing in these companies will likely pay off in the long term.

Still, owning the stocks of individual companies can result in overconcentration risk, company-specific risk and commission costs for retail investors. Good thing plenty of sector-specific exchange-traded funds (ETFs) are available providing easy, low-cost access to large baskets of tech companies. Here are six funds to consider.

Diverse, cheap and liquid

Broad-based ETFs offer the most diverse, low-cost and liquid means to access the tech market. Investors have several choices, from those with low management costs to others with limited exposure to the dominant companies.

Vanguard Information Technology ETF (VGT): Investors seeking to buy the sector in one trade should consider this fund, says Keith Richards, portfolio manager at ValueTrend Wealth Management, affiliated with Worldsource Securities Inc. in Barrie, Ont. “It’s a low-cost go-to for many investors,” says Mr. Richards, who admits he is wary about investing in broad-based tech ETFs given the headwinds facing the FAANG stocks. That said, one upside for those concerned about Amazon’s future is that the retailing giant is not among VGT’s holdings (neither is Netflix). It also has a low management expense ratio (MER) of 0.1 per cent and is among the most liquid of tech ETFs. “That means you can get a tight spread and get out when you want,” he says. The downside is you still get significant exposure to some of the big players, such as Facebook, which is facing challenges over how it shares its users’ data and increased regulation that could hurt its bottom line.

First Trust Nasdaq-100 Technology Index Fund ETF (QTEC): This ETF replicates the Nasdaq-100 Technology Sector index, which covers 100 Nasdaq-listed companies classified as tech firms according to the Industry Classification Benchmark, a globally recognized standard used by Dow Jones and FTSE. Additionally, the index is equal-weighted, meaning no company dominates due to its size, unlike indices based on market capitalization. So while investors in the ETF still get exposure to Alphabet, Facebook and Apple (but not Netflix and Amazon), these large firms are not among the ETF’s top five holdings. Yet QTEC’s foremost benefit is also its biggest drawback: “The ETF provides concentrated exposure to pure tech,” Mr. Barnes says. Alternatively investors could buy a more diversified ETF that simply tracks the broader NASDAQ 100, which contains many of the larger technology firms but also includes companies involved in health care and consumer discretionary, like Amazon and Netflix, providing additional diversification, only for less cost than the 0.6-per-cent MER of the QTEC.

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PowerShares QQQ Trust ETF (QQQ): This fund mirrors the performance of the Nasdaq 100, which has more than “50 per cent tech-sector exposure, while providing diversification into other sectors as well,” Mr. Kletz says. It is the largest and most liquid ETF tracking the index, and includes the FAANGs. The obvious negative for tech-focused investors is that it is not a pure technology play. It also includes, for example, Kraft Heinz Co. and American Airlines Group Inc. Moreover, its 0.2-per-cent MER makes it slightly more expensive than some tech-focused ETFs.

Automation, robotics and more

Investors seeking to avoid the biggest names in technology can take a more targeted approach, such as thematic ETFs emphasizing robotics. Here are a few to consider.

PowerShares S&P 500 Equal Weight Technology Portfolio ETF (RYT): This ETF offers reduced exposure to the FAANGs. While its strategy is like the QTEQ, RYT reduces exposure to any one stock even more. “To illustrate, RYT’s current exposure to FAANG stocks is approximately 4 per cent,” Mr. Kletz says. The drawback, of course, is the very trait that makes it attractive: If the big names in tech outperform, the ETF – which has an MER of 0.4 per cent – will underperform a market-cap-weighted, lower-fee fund.

ROBO Global Robotics and Automation Index ETF (ROBO): This is an ideal investment for those seeking a diversified basket of companies involved in the fast-growing fields of robotics, automation and artificial intelligence, Mr. Barnes says. This ETF is made up of about 80 firms with the largest industry players making up about 40 per cent of the weighting. The remaining 60 per cent consists of companies in a distinct business segment or generating a revenue stream that gives them the potential to become established players in their respective areas of the market. “On the flip side, while it’s great this ETF holds companies you traditionally won’t get exposure to, expect considerable volatility,” he says about the fund, which has an MER of about 0.95 per cent. Given its volatile nature, the ETF should not be a core holding, but rather a complementary investment, he adds.

iShares S&P/TSX Capped Information Technology Index ETF (XIT): Investors seeking Canadian content can look to this fund. “There are actually some pretty good Canadian tech stocks, and you can get all of them with the XIT,” says Mr. Richards. Among its holdings are CGI Group Inc., Shopify Inc., Constellation Software Inc. and OpenText Corp. “If you like these four names, and none of them are really dogs, you could own this ETF to help diversify away from the U.S. tech sector.” The fund also provides exposure to BlackBerry Ltd. and Celestica Inc., two companies with brightening prospects, he adds. Still, XIT is highly concentrated just like the sector it tracks. “You have four stocks that make up the majority of this ETF, and over all, it only includes 10 stocks,” he says. So as these companies go, so too does the fate of the ETF. Its MER is 0.61 per cent.

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