Invest in Tech ETFs Fervently: One to Embrace, Another to Shun
Invest in Tech ETFs Fervently: One to Embrace, Another to Shun
It's an exhilarating period to put money into tech shares. Firms within this domain are revolutionizing at a rapid pace, and today, artificial intelligence (AI) is significantly accelerating this pace.
There are numerous methods to capitalize on this trend. One option is to purchase individual stocks like Nvidia or Amazon. Alternatively, you can search for upcoming tech stocks that might turn into the following Nvidia or Amazon. Having promising or established tech stocks in a diversified portfolio can lead to substantial returns.
Another strategy is to find a top-notch exchange-traded fund (ETF) that focuses on the tech sector. This removes the guesswork involved in picking the winning stocks and provides the benefits of tech investing with reduced risk. However, not all tech ETFs are equal. Some target a limited number of stocks while others follow broader indexes; some are riskier, and others invest in more established tech victors.
If you're searching for an excellent ETF that offers consistent and robust growth with minimal risk, here are two funds to consider – and one to avoid.
Buy: iShares U.S. Technology ETF
BlackRock offers a range of ETFs to address various requirements and risk levels. All of its ETFs are passively managed, which means they mimic an index instead of hiring a manager to select which stocks to invest in. This saves on management costs and provides investors with a pre-selected and diversified portfolio.
The iShares U.S. Technology ETF (IYW -0.46%) tracks the Dow Jones U.S. Technology Capped Index. This ETF is considered a low-risk option, with a high risk-reward rating among BlackRock's ETFs. It's a mix of large-, medium-, and small-cap stocks, all within the tech sector.
It has 200 stocks in its portfolio. This is highly diversified, helping offset some of the risks associated with investing in a volatile sector. Additionally, because the composition is split among various-sized companies, rather than focusing on big tech or emerging companies, the risk is more evenly distributed. However, it's weighted towards larger stocks, with Apple, Nvidia, and Microsoft accounting for 45% of the total.
Despite being considered a high-risk ETF by BlackRock, the tech ETF has shown steady growth over the past five years. And because the risk is reduced in several ways, the fund has delivered strong gains. It's up more than 150% over the past five years, with an annualized five-year gain of 22%.
Because it's BlackRock, it also comes with a lower expense ratio of 0.43% compared to the average of similar ETFs at 0.78%. This is a great choice for investors looking to profit from tech sector gains while reducing their risk.
Avoid: ARK Innovation ETF
Cathie Wood has gained a reputation for investing in disruptive tech stocks that have the potential to transform how the world operates. Wood is a fan of digital, robotics, fintech, and other technology, and she has made early calls about which stocks would skyrocket, such as her favorite, Tesla, which she has invested in through her firm, ARK Invest.
When the tech sector exploded with the acceleration of e-commerce and other digital technology at the start of the pandemic, so did ARK Invest's ETFs. But they haven't kept up during subsequent market volatility.
Although their portfolios are packed with disruptive tech stocks with enormous potential, they aren't well-diversified. The ARK Innovation ETF (ARKK -1.48%), which is ARK Invest's flagship ETF focused on general tech disruption, has only 50 stocks. These are all high-risk tech stocks, with Tesla accounting for 15% of the total and Square, Inc. at 10%. This means investing heavily in a single stock.
The ARK Innovation ETF hasn't performed as well as the iShares Tech ETF over the past five years.
It might be wise to follow Cathie Wood's investment choices and see which companies she believes will be the future stars. However, if you're looking to maximize gains with tech stock exposure while maintaining low risk, the iShares Tech ETF appears to be the better option at present.
Investing in tech stocks like Nvidia or Amazon can yield substantial returns. To reduce the risk associated with picking individual stocks, consider investing in a top-notch ETF that focuses on the tech sector, such as the iShares U.S. Technology ETF (IYW). This ETF is low-risk and offers a mix of large-, medium-, and small-cap stocks within the tech sector, with a diversified portfolio of 200 stocks.
If you're considering the ARK Innovation ETF (ARKK) due to Cathie Wood's reputation for investing in disruptive tech stocks, it's important to note that the ETF has only 50 stocks, making it highly concentrated in a few high-risk tech stocks. Conversely, the iShares Tech ETF offers a more balanced and diversified portfolio, making it a safer option for tech investing with reduced risk.