The Fed left the federal funds rate unchanged yesterday, leaving the yield curve relatively flat in the present time. This gives room for growth stocks, in particular tech-stocks, to eek out more gains. Unless you bought shares of a prominent bellwether tech firm years ago, chances are that you might not want to buy a Google, Amazon, or an Apple at such high valuation nowadays. To decrease risk, it’s probably a good idea to buy a tech ETF, which would give you exposure to all of the high-tech stocks that are doing extraordinarily well in today’s stock market. There are many tech ETF’s out there. However, we are just going to focus on three of them here.
PowerShares QQQ ETF
This ETF is probably the most prominent out of all the tech ETF’s in the entire equities market. The QQQ tracks the top 100 companies in the NASDAQ Index, consisting of companies mainly in the tech, telecommunications, and biotech sectors. The largest portfolio holdings include Apple, Microsoft, Amazon, Facebook, and Google (Alphabet). The QQQ is a Market Cap weighted ETF, meaning that larger companies take more of the fund’s allocation, thereby leaving lower growth for smaller cap stocks. So, one should be aware that Market Cap weighted funds usually underperform when smaller cap stocks are leading the market. Intuitively, smaller cap stocks usually have more room for growth than large caps. Therefore, periods of economic growth usually favor more “equally balanced” technology funds.
Guggenheim S&P 500 Equal Weight Technology (RYT)
This ETF is very special in that the portfolio consists of all the S&P 500 big cap tech stocks at equal weights. There are approximately 50+ companies in the fund, with allocations less than 2% per a company. Holdings include big names, like Oracle (ORCL), Xerox (XRX), Corning (GLW), Western Digital (WDC), and Adobe Systems (ADBE). As we can see, there’s a good mix of newer and some “old-school” names in the crowd. Some growth and some value, but all at about the same percentage “weight” in the fund. This ETF gives us a true diversification of companies in the tech space.
First Trust Dow Jones Internet ETF (FDN)
If you like the FANG stocks, which consist of Facebook, Amazon, Netflix, and Google (Alphabet), then this is your ETF. This fund gives us the greatest exposure to the FANG stocks. Other outstanding fund holdings include PayPal (PYPL), which has a deep moat in the online payments system, and Salesforce.com (CRM), which is a big player in the Cloud Computing space. Both, online payments and cloud computing are key players for major growth in the future of technology. Regardless of whether you like PYPL or CRM, the FANG stocks make up more than 30% of the fund’s portfolio. So, if you would like exposure to all the FANG stocks in one quick purchase, then buy FDN.
Above is a Year-To-Date chart on the three ETF’s performance over the past seven and a half, or so, months. As we can see, FDN outperformed the other two funds due to the meteoric rise of the FANG stocks. Will this trend continue in the very near future? Very likely. But, will FDN continually outperform the other two funds over time into the far out future? It really depends if you believe whether the FANG stocks will continue to outperform the overall tech sector. If FANG continues their over-performance into the future, then FDN will be the best fund to invest your money. If the FANG stocks fail to outperform other tech companies, then we are better off putting our money into the Q’s or an equal weighted ETF. Just remember that the US yield curve is relatively flat now, and that tech stocks are where it’s all at.