The tech sector has been on fire for a long time, and the high-growth tech stocks that have led the market higher recently have built up considerable momentum coming into 2018. For those who like to invest in diversified portfolios of stocks in particular sectors, technology ETFs have become increasingly popular, with the largest funds attracting plenty of assets.
You can always go for broad-based tech ETFs that follow vanilla market-cap-based approaches to investing in the sector. But there are also some alternatives that can work better for you. Here's why Guggenheim S&P Equal Weight Technology, iShares Exponential Technologies, and First Trust ISE Cloud Computing are the top tech ETFs for 2018.
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Losing some weight
One thing that's been pretty unusual about the recent bull market is that large-cap stocks have been doing as well or even better than many of their small-cap counterparts. That's unusual in the tech sector, where usually, the biggest companies have trouble keeping up with the strong growth potential that smaller upstarts have.
The Guggenheim ETF takes a middle-ground approach to the debate between whether large-cap or small-cap stocks are better investments in technology. It focuses solely on companies in the S&P 500, but rather than giving the largest stocks the most weight, it invests equally in every tech stock in the index. Over time, that approach has worked well, and especially after a year in which that general rule didn't hold true, 2018 looks like a good year for the Guggenheim ETF to do well.
Looking for exponential gains
Technology inspires investors because of its groundbreaking innovations, and the iShares ETF on this list aims to capitalize on those trends. The fund looks to find leading innovators globally that have the most promising technologies. That pursuit has led to a portfolio that's about 60% invested in U.S. stocks but that also has considerable exposure elsewhere, including a roughly 30% exposure to Europe, as well as small investments in Japan, India, and Canada.
From a sector standpoint, not all of the stocks you'll find in the iShares ETF fall into the traditional tech category. Healthcare also makes an appearance because of the importance of biotechnology and high-tech medical devices to that sector, and exposure to telecom, financials, and even old-economy areas like industrials and materials have notable allocations within the fund thanks to initiatives like electric vehicles and cutting-edge natural resource extraction techniques. If you appreciate technological advances, you'll find this ETF has a broader reach than most traditional tech funds.
Soaring into the clouds
Cloud computing has been a big growth area in tech lately, and the First Trust fund aims to concentrate on that high-growth segment. The ETF holds 30 stocks, divided between pure-play providers of network hardware and software services and data storage, and non-pure-play companies that support the industry. Large conglomerates have a limited exposure of 10% of the total fund assets, and the majority of the stocks in the fund have about a 4% to 5% weighting.
Growth of the cloud shows few signs of slowing, as enterprise customers demand the flexibility and cost-effectiveness that cloud computing offers. As long as those trends continue, the First Trust ETF will be in a good position to benefit.
Can tech keep climbing in 2018?
After a strong 2017, tech investors can't necessarily expect the record-setting performance in 2018 that they saw last year. These ETFs, however, make a good case for giving investors what they need in order to succeed in the long run with their technology investments.
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