With the COVID-19 pandemic bringing about remote working arrangements and increased demand for home delivery, entertainment and other stay-at-home services, it is no surprise that technology was the best performing sector of the stock market in 2020. While the broad Standard and Poor’s 500 Index returned 18% in 2020, the technology sector surged 44%, and of the 11 sectors comprising the index, technology grew to represent 28% of the index.
While the tech sector has had quite a run over the last year and many areas of the market may be overvalued, there are also areas that may still look attractive. There are more than 50 exchange traded funds (ETFs), hundreds of mutual funds, and even more individual company stocks from which to choose in the technology sector.
While an investor can always purchase the stock of an individual company, doing so carries certain risks such as individual stock volatility, and your entire investment being contingent on the successes and failures of one company. For most of the general public, their investment needs may be better served by a mutual fund or ETF, which includes a number of companies within the technology sector.
Investors seeking to invest in technologies should conduct a little research when selecting an investment vehicle to truly understand what they are investing in. A mutual fund or ETF may have very broad or specific mandates for the manager. What an investor may think is a broad technology focused mutual fund may be very specific to a subsector of the market. Likewise, an investor seeking an investment in a specific subsector of the market, such as electric vehicles for example, may be getting a more broad-based approach.
What we often find is investors seeking to invest in very specific technologies that they believe in for their prospects of growing and doing well. These investors may be best served by an ETF. With headlines focused on cryptocurrencies, many investors have asked about gaining exposure to this area. We have advised clients that currencies themselves are very volatile and investing in companies that facilitate cryptocurrency transactions may be a less volatile way to capitalize on opportunities in that market, and there are ETFs focused specifically on the blockchain technology behind cryptocurrencies.
Other investors may be interested and following the worldwide chip and semiconductor shortage, the pent-up demand for travel, online media, entertainment, and streaming services, the demand for cleaner energy, and even the demand for online betting. There are ETFs that invest in baskets of stocks of companies that are developing these emerging and growing technologies.
About the Author
Michael Flower, CFP® is managing director, partner, of Fairfield-based Hightower Financial Principles.
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