Most Canadian investors buy broad-market index exchange-traded funds (ETFs) that track stocks from a variety of stock market sectors. This approach offers high diversification among different industries and is a good way to obtain the market’s long-term average return.
The different stock market sectors within these broad-market index ETFs perform differently, and the weighted average of their performance becomes the overall return of the index. However, investors can also go for a more focused strategy by targeting a specific sector.
A highly popular sector is technology, which has grown in recent years to dominate many indexes.
Investors interested in overweighting technology to bet on the sector’s possible outperformance can pick individual tech stocks, but a more diversified and accessible approach is via a technology ETF that holds many different technology stocks. Here’s all you need to know about Canadian technology ETFs.
What is a technology ETF?
A technology ETF is a fund that holds a portfolio of stocks in the software and services, technology hardware and equipment, and semiconductor industry groups.
ETF shares are traded throughout the day on exchanges, like stocks are with their own ticker symbol. When investors buy shares of a technology ETF, they gain exposure to the returns of the underlying tech stocks held.
The process of how a technology ETF selects its portfolio is determined by its strategy, which can be classified as active, passive, or “Smart Beta”:
- Active: These technology ETFs select stocks based on the fund manager’s own research and strategy, usually in an attempt to beat a benchmark.
- Passive: These technology ETFs aim to track an external index as closely as possible to replicate its holdings and returns.
- Smart Beta: These technology ETFs are a hybrid between active and passive ETFs, employing systematic quantitative strategies to screen stock holdings for specific factors.
Because technology stocks come from countries around the world, a technology ETF may also have a particular geographical focus. For example, some technology ETFs will focus on U.S. technology stocks, while others may hold only Canadian technology stocks. Others may have a global focus.
Finally, technology ETFs charge a management expense ratio (MER) to investors. This covers the ETF’s fees and costs and is deducted from your total investment on an annual basis. For example, if you invested $10,000 in a Canadian technology ETF with a 0.25% MER, you can expect to pay around $25 in fees over the year.
Top Canadian tech ETFs
The following Canadian tech ETFs rank among the most popular in terms of assets under management (AUM).
|BMO NASDAQ 100 Equity Hedged to CAD Index ETF (TSX:ZQQ)
|Tracks the return of the Nasdaq 100 index hedged to the Canadian dollar.
|TD Global Technology Leaders Index ETF (TSX:TEC)
|Tracks the return of the Solactive Global Technology Leaders Index
|iShares S&P/TSX Capped Information Technology Index ETF (TSX:XIT)
|Tracks the return of the S&P/TSX Capped Information Technology Index
BMO NASDAQ 100 Equity Hedged to CAD Index ETF
As a Nasdaq-100 index ETF, ZQQ isn’t exactly a pure-play technology sector ETF. However, it holds a substantial allocation in large-cap U.S. technology stocks at 50.9% of its portfolio, with many in the top 10 holdings. As a result, ZQQ provides good U.S. technology sector exposure. The ETF is hedged to the Canadian dollar to mitigate volatility from exchange rate fluctuations.
TD Global Technology Leaders Index ETF
TEC tracks the Solactive Global Technology Leaders Index, which holds a market-cap weighted index of large- and mid-cap tech stocks from around the world. As for country exposure, 84% of this ETF is held in U.S. tech stocks, with the rest in European, Japanese, and Canadian tech companies. Investors looking for a slightly more diversified alternative to ZQQ with a pure-play technology sector focus might like TEC better.
iShares S&P/TSX Capped Information Technology Index ETF
Investors wishing to focus on the TSX technology sector can consider XIT, which tracks the S&P/TSX Capped Information Technology Index. This ETF holds just 27 Canadian technology stocks, with Constellation Software (TSX:CSU) and Shopify (TSX:SHOP) accounting for 50% of the ETF’s total holdings at around 25% each. As a result, XIT tends to be fairly top-heavy and under-diversified compared to other sector ETFs.
How to buy tech ETFs in Canada
The process of how to buy tech ETFs follow the steps outlined in our guide on How to Buy ETFs in Canada: open a brokerage account, determine your asset allocation, conduct research, and make a trade, but with a few additions:
- Screen for technology exposure: This can be done via online ETF screening services, by either filtering for ETFs that track technology indexes or ETFs with substantial technology holdings.
- Watch for U.S. ETFs: Canadian investors can purchase U.S.-listed technology ETFs, and there may be a wider selection there. However, be aware of potential currency conversion costs.
- Beware of exotic ETFs: Some Canadian technology ETFs may also make use of derivatives to produce enhanced exposure. Covered call, inverse, or leveraged technology ETFs tend to be tools for advanced investors and traders with specific goals in mind. Ensure you do sufficient research on these products before purchasing.
Are technology ETFs a good investment?
Investors who decide to overweight the technology ETFs in their portfolio should critically examine their rationale for doing so. Many existing and popular index ETFs already hold a substantial portion of technology stocks. By adding another technology ETF, investors could open themselves up to greater volatility and sector-specific risk. The technology sector has outperformed in recent years, but has also severely underperformed in some cases, such as the Dot-Com bubble.
Before investing in a technology ETF, consider your investment thesis. Ask yourself: “What reasons do I have to believe that technology stocks will outperform over my intended holding period?” Then, conduct research by assessing reputable sources for both sides of the argument. Finally, ask yourself: “What are the chances that my reasons to be bullish are already ‘priced in’ by the market?” Asking these questions will help you make more rational decisions when it comes to selecting the right technology ETF.