Three Top Tech ETFs for 2017

tech etfsAre Tech Sector ETFs a Good Bet?

Exchange-traded funds (ETFs) are a tech investor’s best friend. Rather than putting your money in a single stock, you can use tech sector ETFs to bet on an entire industry, technology, or innovation.

In other words, the top tech ETFs of 2017 can help you bet on the future while preserving your capital. It’s about spreading eggs into multiple baskets.

Here’s how the best technology ETFs work.

Some investment firm—such as The Vanguard Group Inc, BlackRock, Inc. (NYSE:BLK), or State Street Corp (NYSE:STT)—pools together enough money for a fund. It decides on a mandate, such as “we will only invest in microchip companies,” or “we will only buy shares of e-commerce stocks,” and it puts that down in ink. It becomes the fund’s manifesto; an immovable, unchangeable direction of the fund’s assets.

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Next, it draws up a list of stocks that fit the manifesto. It buys small numbers of shares in each company, apportioning the weight by market cap or some other metric. No one tries to pick winners or losers, because that’s not the point. The point is to limit risk, pure and simple.

In finance, we call this “diversification.” It is an ancient tactic with roots in military strategy but, for some reason, most investors ignore its wisdom. Just look at how warfare has been conducted for centuries. No admiral worth his salt keeps all his cargo in one ship. What if that ship is sunk by enemy forces or foul weather? The entire cargo would lie at the bottom of the ocean.

It would be an absurd risk to take, much like holding an investment portfolio of only one or two stocks. Are you investing or gambling? Don’t get me wrong, the market is capable of mispricing stocks (which is where the opportunity for big gains comes into play), but it doesn’t happen very often. Some stocks are undervalued, but most of them aren’t.

It takes a lot of research and analysis to find the stocks that are trading at a discount. That’s our specialty here at Profit Confidential. However, we recognize that not everyone is built the same way. Some folks don’t want to take on a tremendous amount of risk, which is why the top tech ETFs of 2017 might be a better play for them.

Before we get to my tech ETF list, there is one misconception that needs addressing—namely, the idea that ETFs are the same thing as mutual funds. They are two separate things. Some investors get them mixed up, so here’s a quick breakdown of the differences.

Best Technology Funds: ETFs vs. Mutual Funds

Mutual funds and ETFs look pretty similar at first blush. Both of them are driven by an explicit mandate, pooled money from investors, and diversification. But that doesn’t mean they are the same thing. A closer look reveals some startling differences.

For one thing, mutual funds are “actively managed.” This means there is a fund manager and a research team trying to outperform the market by buying and selling stocks. In most cases, these managers take an extra “management fee,” regardless of whether the fund is successful.

The best technology ETFs provide similar upside, but they apply a much smaller fee because they are “passively managed.” Many analysts (myself included) find this hard to swallow. If there is no evidence that mutual funds provide significantly higher returns, why would anyone pay the higher fees?

It doesn’t make sense.

Pricing is another difference between mutual funds and the best technology ETFs. The prices of mutual fund units are determined by the “net asset value” of the fund, which is just a fancy way of saying the net worth of the fund. It is updated once a day, at the close of business.

ETFs are completely different. They trade on a public market, much like stocks do. You can buy tech sector ETFs on the NASDAQ, industrials ETFs on the Dow, and consumer goods ETFs on the New York Stock Exchange (NYSE). Or you can find them in the over-the-counter market. But the important point to remember is that their prices are fluid; they are continuously updating.

So, to recap:

  1. ETFs have lower management fees because of passive strategies.
  2. ETFs are priced more clearly than mutual funds.

Based on these two observations, mutual funds are by far the worst option. Think about it: if you’re bullish on a broad swath of the market, ETFs make a lot of sense. On the other hand, if you’re looking for active management, then you might as well try a little stock-picking yourself. There are investing newsletters to help you sort the wheat from the chaff.

Now that we’ve sorted that out, let’s drill down on my tech ETF list for 2017.

techETFs

 

1. Top Tech ETFs of 2017: Vanguard Information Technology ETF (NYSEARCA:VGT)

Expense Ratio: 0.10%

Technology is a broader term than we think it is, yet most people confine its definition to information technology (IT) stocks. This includes the likes of Facebook Inc (NASDAQ:FB), Microsoft Corporation (NASDAQ:MSFT), and Alphabet Inc (NASDAQ:GOOG).

There’s a good reason why investors have this perception. Information technology has produced some of the best tech stocks of the last few decades, so it’s no wonder they dominate news headlines. Shares of Amazon.com, Inc. (NASDAQ:AMZN) and Netflix, Inc. (NASDAQ:NFLX) are two great examples. Over the last five years, they rose 347.63% and 697.55%, respectively.

Courtesy of Stockcharts

Chart courtesy of StockCharts.com

However, not everyone can stomach the risk that comes with individual stocks. These investors should take a closer look at Vanguard Information Technology ETF (NYSEARCA:VGT).

It is supposed to reflect the MSCI US Investable Market Information Technology 25/50 Index, and it only costs about $1.00 for every $1,000.00 invested. Moreover, the VGT tracks 374 stocks, holds $10.87 billion in assets, and delivers a steady return. It is already up 13.77% year-to-date.

Courtesy of Stockcharts

Chart courtesy of StockCharts.com

VGT is among the best tech ETFs because it gives investors exactly what they’re looking for: a broad bet on the U.S. tech sector. History has shown that if you’re bullish on the big U.S. stocks as a whole, you’re likely going to come out ahead. The charts speak for themselves.

2. Top Tech ETFs of 2017: VanEck Vectors Semiconductor ETF (NYSEARCA:SMH)

Expense Ratio: 0.80%

The top tech ETFs of 2017 can come in different shapes and sizes. The VGT listed above is mostly focused on market capitalization in the tech space. You’ll find that the biggest stocks tend to have a bigger presence in the portfolio, which is one way of going about the business of tech investing. But there’s another way to score massive gains.

Rather than placing a broad bet on the entire tech market, investors can turn bullish on tech sector ETFs, such as the VanEck Vectors Semiconductor ETF (NYSEARCA:SMH). These investments have a narrower mandate than the others we’ve talked about. The SMH, for instance, only tracks the Market Vectors US Listed Semiconductor 25 Index, meaning that at least 80% of its assets must be invested in stocks that you’d find on that index.

Diversification really came into play with this particular ETF. Semiconductor stocks were a mixed bag during the past few years. Some were hit pretty hard while others shot through the roof.

We at Profit Confidential correctly identified a few of the winners, but there was still more risk than some investors could handle. This ETF was a great substitute for many of those folks.

Barely one month into 2017, it has already delivered 35.53% growth. That is impressive by any standard, meaning that SMH is catching fire as we head into 2017.

Courtesy of Stockcharts

Chart courtesy of StockCharts.com

3. Top Tech ETFs of 2017: First Trust DJ Internet Index Fund (ETF) (NYSEARCA:FDN)

Expense Ratio: 0.54%

First Trust DJ Internet Index Fund (ETF) (NYSEARCA:FDN) is one of the more sensitive tech sector ETFs. It is prone to major swings in volatility, mostly to the upside, and particularly in relation to Internet stocks. In other words, FDN is among the best technology ETFs of 2017 because it invests heavily in companies like Facebook Inc.

This may sound similar to the Vanguard ETF we listed above, but there are nuanced differences between the two. The VGT was skewed toward IT companies, which meant it had large holdings in Visa Inc (NYSE:V) and Mastercard Inc (NYSE:MA).

Those types of companies don’t appear in the top holdings of the FDN, so they are not identical bets. The First Trust Internet Index is more focused on Internet growth stocks, hence the dramatic swings.

This difference is apparent in each indices’ No. 1 holding. VGT had Apple Inc. (NASDAQ:AAPL), which is a stable and profitable tech stock. FDN had Amazon.com, Inc. (NASDAQ:AMZN), a carnivorous growth stock that seems to move upward at a relentless clip.

While these two stocks may look interchangeable to the untrained eye, they are actually worlds apart. First Trust is on the cusp of extraordinary growth as we continue in 2017, so I would recommend keeping a close eye on this tech ETF.

Courtesy of Stockcharts

Chart courtesy of StockCharts.com

Bottom Line on Best Technology ETFs

As you can see from our tech ETF list, the top tech ETFs of 2017 share several things in common, namely diversification, low management fees, and reliable returns. These are not coincidences. The best technology ETFs share certain qualities because those traits secure massive gains for investors.

Remember that tech sector ETFs are best used by investors that can’t bear the risk of investing directly in stocks. They guard against downside risk by spreading risk across dozens (if not hundreds) of companies. This type of investment has proven successful for millions of investors, so it’s definitely worth a closer look.