The artificial intelligence boom has spawned all kinds of exchange traded funds (ETFs) specializing in this narrow slice of the technology market. At the same time, the tech-driven bull market has led to an explosion of covered call tech ETFs offering double-digit yields and even leveraged versions built for short-term trading.
It helps to take a step back and remember what really matters for most ETF investors: low fees and broad diversification. That is why my best tech ETF pick for Canadian investors is refreshingly simple, easy to understand, and backed by billions in assets. The ETF is the TD Global Technology Leaders Index ETF (TSX: TEC).
Source: Getty Images
What is TEC?
This ETF is a passive fund, meaning its portfolio is designed to replicate a benchmark index rather than rely on a portfolio manager to pick winners. TEC tracks the Solactive Global Technology Leaders Index, which follows a rules-based formula to select and weight stocks.
The index holds global mid- and large-cap companies. Mid-cap refers to companies worth a few billion dollars, while large-cap generally means the biggest and most established tech names. The wording “related to technology” is important because this ETF goes beyond the strict technology sector and the United States.
Companies with strong tech characteristics can appear in communications, consumer discretionary, or healthcare. Index providers consider these firms part of the innovation economy. TEC also expands past the U.S. into Europe and Asia, especially Japan and Taiwan. The result is a global basket that lets you buy the entire tech haystack in one trade.
How much does TEC cost?
You do not pay ETF fees up front. They are deducted gradually from the assets of the fund. This annual charge is called the management expense ratio, or MER.
TEC has a 0.39% MER. On a $10,000 investment, this works out to about $39 per year. Taxes are minimal because most of the return comes from share price appreciation rather than dividends.
Since fees come out of the fund’s returns, TEC will trail its index slightly over time. This difference is known as a tracking error, and it is normal for passive ETFs. Keeping fees lower minimizes tracking error.
The Foolish takeaway
TEC works well in a non-registered account because most of its return comes from capital appreciation rather than dividends, which keeps annual taxes low. And if the tech bull market ever cools and you’re sitting on unrealized losses, TEC becomes even more useful: you can sell it, claim the capital loss, and use that amount to offset gains elsewhere in your portfolio or carry them forward.
