If you are looking for a good long-term investment, an exchange traded fund (ETF) geared towards the technology sector is a great place to look. The sector has taken the market to new heights in the past decade and has been one of the best performing sectors for decades, even in periods of volatility.
When looking for the right technology-focused ETF to invest in, know that they are not all the same. Some invest in a much wider range of the sector, while others are more concentrated and focus only on information technology, for example, or some other area. Some look only at large caps, while others also include smaller companies. Some have higher rates.
Two of the best and most popular options are Fidelity MSCI Information Technology Index ETF (NYSEMKT: FTEC) and State Street SPDR technology selection background (NYSEMKT: XLK). These ETFs have some important differences. Let’s look at both to see which is the best buy.
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Cheaper and more diverse
The Fidelity MSCI Information Technology Index ETF is one of the cheapest technology-focused ETFs on the market, with an expense rate of 0.08%. It tracks the MSCI USA IMI Information Technology 25/50 Index. This may sound like an indecipherable mix of letters and numbers that make no sense. But there is a logic to this. Let’s share a little more and maybe get some tips on what this fund does.
MSCI means Morgan Stanley Capital International, which is an investment research company that provides analytical tools for institutional investors, as well as benchmarks for the markets. IMI stands for investment market index, which means that it obtains around 2,400 shares from the entire investment market, including large, medium and small capitalization companies. This means that this fund selects shares from the investment universe of the information technology (IT) sector, but applies certain investment limits to help ensure diversification. This is part 25/50, which means that no more than 25% of the fund’s assets can be invested in a single share and the sum of all issuers representing more than 5% of the fund cannot exceed 50% of the assets fund totals.
For all these reasons, this is a broad-market IT technology fund that, by its nature, has a diversified portfolio with around 331 holdings that cover the spectrum of names from large to small capitalization. The two largest holdings are Apple 20.9% of the general fund and Microsoft at 15.5%, but everything else is 3.6% or less. The ETF had a one-year return of 43.4% and a five-year annualized return of 25.4% through November 30. Since its creation in 2013, it has had an annual return of 22.7%.
Going beyond IT
The SPDR State Street Technology Select Fund differs from Fidelity ETF in several ways. First, it is one of the oldest and largest technology-focused ETFs on the market. The fund has existed since 1998 and has $ 37 billion in assets under management, making it the third largest technology ETF.
It tracks the technology sector within large companies S&P 500 but it’s not just limited to IT names like the Fidelity fund. Includes shares of companies in:
- Technology, storage and peripheral hardware
- Software
- Communication equipment
- Semiconductors and semiconductor equipment
- IT Services
- Electronic equipment, instruments and components
Although drawn from a wider universe of technology industries than the Fidelity fund, it actually has a more concentrated portfolio with around 74 names, since it only includes large capitalization shares within the S&P 500. The two largest holdings are Apple ( 24.3%) and Microsoft (19.4%).
As for performance, it had a return of 41.9% last year, with an annualized return of 24.8% in the last five years. Its 10-year annualized return is 19.7%. The expense ratio is 0.13% lower than most of its competitors, but it is slightly higher than the minimum Fidelity ETF expense ratio.
What is the best buy?
These are two of the biggest and best performing ETFs in the technology industry, so you really can’t go wrong with any of them. But I would choose the Fidelity MSCI Information Technology Index ETF if I had to choose one. Returns have been slightly better and the expense ratio slightly lower.
In addition, I prefer the broader diversification of the fund, as it has more holdings and chooses from a broader selection of technology stocks, including large, medium and small companies. In addition, asset weighting limits provide some stability in what can be a volatile sector.