Investing in Technology — The Cheat’s Guide

You’ve been reading the paper online.

And you’ve just started shopping online.

Like it or lump it, the only photos your adult children show you are the ones they post on social media platforms. They’d never think of printing them out for you to stick on your fridge.

And you suspect your six year old grandkid is a genius because they just debugged your computer for you.

Technology is everywhere.

Perhaps up until now you’ve been reluctant to invest in it.

After all, in Australian there are limited technology stocks to choose from

Pure tech or internet companies are hard to come by.

I mean, there are established internet businesses you can invest in like Seek Ltd [ASX:SEK ] or Limited[ASX: CRZ]. Even the newcomer to the tech sector Freelancer Limited [ASX:FLN] could be an option.

Aside from those, technology investment opportunities in Oz are far and few between.

This means, if you’re keen to invest in tech firms, you really need to look at the American market.

But this poses its own problems.

Technology stocks in the US are far more volatile than Australian companies. This means as an investor, you need to be prepared for more risk.

And even then, what companies do you start with?

There are mature tech stocks like Microsoft [NASDAQ:MFST], Cisco [NASDAQ:CSCO] or IBM [NYSE:IBM]. Or social media stocks like Facebook [NASDAQ:FB] and Twitter [NYSETWTR].

And who wouldn’t want a few Apple [NASDAQ:APPL] or Google [NASDAQ: GOOGL] shares in their portfolio?

The thing is, many tech firms in America are very expensive. And because of restrictions on international broking accounts, you may have to use a larger amount of capital for one trade. Essentially leaving less to spend elsewhere.

However if you do want to invest in tech stocks, perhaps you should consider investing in a technology exchange traded fund (ETF) in the US. Some of which pay a dividend…

The advantage of investing in an ETF is it gives you exposure to companies you might not normally have thought of buying before.

Look at it this way.

By choosing a few ETFs you can easily gain exposure to not only the old-school stocks of technology like Microsoft, Intel, Cisco…but also access the social media craze without making a speculative punt.

Let’s have a look at your options.

But first, let me remind you that any investment in American ETFs will expose you to currency fluctuations in the Aussie dollar. This adds to your risk, and will affect your profits or losses, depending on whether the exchange rate moves against you or in your favour.

The four I’ve picked to show you today offer exposure to a variety of tech stocks.

Let’s start with the ETF that offers a good base of technology shares.

The First Trust Exchange Traded Fd VI [NASDAQ: TDIV], includes some of the biggest and most stable technology companies in America. The top three company heavy weights are IBM, Cisco and Apple. The next big three companies are Qualcomm [NASDQ:QCOM], Oracle [NYSE:ORCL] and Hewlett Packard [NYSE:HPQ].

Out of all of the technology driven ETFs, this is the least volatile. And it pays a 2.40% dividend. The TDIVs main focus is the captains of the US tech industry, and it has a minimal exposure to micro tech stocks.

Next to consider is the Technology SPDR [NYSE:XLK]. This one is about as volatile as the TDIV, and pays a slightly lower dividend of 1.80%

However, over 30% of the ETF is dedicated to Google, Apple and Microsoft. Basically, if you want access to Apple and Google stocks without forking over an entire pay cheque to end up with just two shares, this might be the ETF for you.

While investing in the pillars of the US tech industry is tempting, it’s hard to ignore the riskier, but potentially more profitable social media companies.

If you don’t mind having your heart in your throat every time the US market trades, there’s the Global X Funds Social Media ETF [NASDAQ: SOCL].

All of the social media giants are here. Facebook, Linked In [NYSE:LNKD], Yelp [NYSE:YELP], Google, and Twitter are all in top ten constituents of this ETF.

An added bonus is that half of the ETF is based on American social media companies, and the other social media firms come from Europe, Japan and China. Meaning your exposure isn’t limited to the American market.

But fair warning — this is a volatile ETF. It has outperformed the other ETFs I’ve mentioned today, but that performance comes with higher risk. So far this year, SOCL is down 9%. But in the previous 12 months it rallied a massive 38%.

Finally, there’s also a way you can ride the current enthusiasm behind cloud technology. In fact, I’ve declared it’s the ‘year of the cloud’ in America because of the nine cloud-based companies debuting on the market this year.

So if you want exposure to the cloud computing industry, perhaps look at the First Trust Exchange-Traded Fund II [NASDAQ:SKYY].

Aside from Facebook featuring in the top ten, the companies with the biggest weightings in this ETF aren’t well-known in Australia.

But that’s okay. They’re all big names in the US global cloud computing industry.

Now one of the advantages with ETFs is their constituents are reviewed quarterly. This means some of the companies with an IPO this year may end up getting a look in.

As you can see, all four of the ETFs I’ve discussed today have outperformed the S&P/ASX200 in the past year.

ETF’s TDIV, XLK, SOCL and SKYY Out-perform ASX200

Source: Google

I’ve only mentioned four today, but overall there are 42 tech ETFs to choose from in the US market.

And unlike some of the individual companies I’ve covered today, these tech ETFs are trading between US$15–$36. This makes them a far more affordable option than say Apple or Google on their own.

So which is the ETF for you? Well that all depends on the risk you’re willing to take. XLK and TDIV are the more stable of the four, as they are made up of tech giants that form the foundation of the US tech industry. Plus they offer an income stream through their dividends.

The SOCL and SKYY ETFs are weighted towards the new, riskier firms in the tech sector. There’s no income, but these are the new companies that are shaping the future of the internet and technology. They’re the second generation of tech stocks. And if you can stomach the risk, they have the potential to hand you much bigger gains.

Shae Smith,
Editor, Money Weekend

Since starting out in the financial markets over a decade ago, Shae has extensive experience across various aspects of the industry. Shae cut her teeth in the derivatives industry, teaching clients basic trading techniques with technical analysis.

Joining Port Phillip Publishing eight years ago, Shae has worked across a number of publications, such as Australian Small-Cap Investigator, Gold Stock Trader and Microcap Trader. She’s spent the past two years however, honing her macro analysis skills alongside Jim Rickards, showing Australians how to invest and profit form global macro trends.

Drawing on her extensive experience, Shae is a contributor to Money Morning, and lead editor of sister-publication Markets & Money, where she looks at broad macro trends developing around the world, combining them with her distaste for central banks and irrational love of all things bullion.

Money Morning Australia