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We normally don't like exchange-traded funds (ETFs) because want better than average returns. But some tech stocks are so explosive you simply can't afford to miss out. And owning the best tech ETFs in those sectors is the simplest way to make sure you don't. They're crucial to any savvy tech portfolio.
"As far as I'm concerned," says Money Morning Defense and Tech Specialist Michael Robinson, "They make great foundational plays."
Morningstar data shows the total value of global ETFs comes in at nearly $9 trillion. And that's just for this year alone.
By mid-August, $736.5 billion flowed into ETFs - close to the total for all of 2020. This makes ETFs an extremely valuable component of any successful portfolio because it shows high investor interest. And that interest drives better returns - especially when compared to active funds in recent years.
Buying a whole basket of stocks in one place offers diversification in your portfolio. It's a highly cost-effective way to do this, without all the risk that comes with active investing. This makes them the perfect vehicle if you don't have the time or ability to sort out the winners from the losers.
But not just any tech ETF will cut it. In fact, owning the wrong ETFs could cost you.
There are two elements Michael looks at when reviewing ETFs: expense ratio and the Morningstar rating.
With those ETF requirements in mind, let's look at three tech ETFs to buy and hold for the long run...
Tech ETF No. 1: SPDR S&P Semiconductor ETF
SPDR S&P Semiconductor ETF (NYSE: XSD) takes advantage of our tech-driven world's need for semiconductors. It's in just about everything anymore from smartphones and televisions to cars.
Through this ETF, you invest in 41 companies that span nearly every area of the semiconductor industry.
SiTime Corp. (NASDAQ: SITM), a company that develops silicon-based timing solutions, is the ETF's largest hold at 4.6%. It manufactures oscillators, clock generators, and embedded resonators used in ethernet switches, computing devices, graphics cards, disk drives, and mobile phones. Recently, Barclays raised the price target for SiTime from $175 to $245. Shares of the semiconductor rose 1.4% after the announcement.
Then there's Advanced Micro Devices Inc. (NASDAQ: AMD), a top chipmaker that specializes in advanced, high-speed devices. The company comprises 3.03% of the ETF's portfolio.
Lattice Semiconductor Corp. (NASDAQ: LSCC) is a key chip supplier. Its devices can be programmed for remote applications that bypass data centers for faster computing. The chip supplier makes up 2.96% of the portfolio.
And Nvidia Corp. (NASDAQ: NVDA) makes cutting-edge graphics processors that can be used for virtual reality and artificial intelligence. It accounts for just shy of 2.91% of the portfolio.
For those who can't decide between AMD or Nvidia, this is a great way to invest in both chipmakers - as well as many other strong companies in the sector.
When it comes to expense ratio, XSD has the lowest of these three ETFs at 0.35%. Typically, it's best to consider ETFs with an expense ratio lower than 1%. The lower the ratio, the less overhead and management fees.
XSD ranks a very solid 4 out of 5 when it comes to the Morningstar rating. For context, Morningstar is an independent investment research company that covers roughly 621,000 stocks, mutual funds, and ETFs. And it's been doing this kind of research since 1984. It's best to avoid ETFs with less than 3 stars because those are often the funds with less quality.
Over the past two years, the XSD has beat the S&P 500's overall returns by 126%. We're expecting those market-beating returns to continue.
Tech ETF No. 2: Amplify Transformational Data Sharing ETF
Buying Bitcoin or another cryptocurrency is the most direct route to invest in blockchain technology. Aside from that, there aren't many other ways.
Except for this one.
For those of you who might not be too comfortable with crypto investing, it's a tough pill to swallow. Especially when you consider that the global market for blockchain technology was $3.67 billion in 2020 and is expected to reach more than $394 billion by 2028.
While the industry is still waiting for the U.S. Securities and Exchange Commission (SEC) to approve a cryptocurrency exchange-traded fund (ETF), there are several blockchain-focused ETFs already on the market.
Amplify Transformational Data Sharing ETF (NYSE: BLOK) offers the chance of exposure to the crypto industry. And BLOK has several enticing picks - from the fintech leaders like PayPal Holdings Inc. (NYSE: PYPL) and Square Inc. (NYSE: SQ) to the popular crypto bank Silvergate Capital Corp. (NYSE: SI).
The software company MicroStrategy Inc. (NASDAQ: MSTR) holds a major stake of the BLOK portfolio at 5.55%. It recently purchased another 5,050 bitcoins for about $242.9 million. That raises the value of its 114,042-bitcoin holdings to nearly $5.3 billion. According to Bloomberg, that's higher than what 80% of non-financial S&P 500 companies hold in cash.
BLOK has an expense ratio that falls below the 1% mark at 0.7%. And the ETF sports a Morningstar rating of 4 out of 5.
And over the past two years, the ETF has returned 117% compared to the S&P 500's 50%.
Tech ETF No. 3: iShares U.S. Medical Devices ETF
The iShares U.S. Medical Devices ETF (NYSE: IHI) is one that Michael recently recommended.
While this ETF lagged the market as investors took gains following the COVID-19-related rise in values, the IHI did something unusual among ETFs: It split 6-to-1.
This makes shares cheaper and opens up the ETF to more buyers at a time when there's a high amount of new cash flowing broadly into the market, particularly so in this class of investments.
And IHI has beaten the S&P 500 by 35% since the split went through back on July 19.
Over the past five years, this ETF has beaten the broader market by 60.5%.
This is an ETF that covers a broad spectrum of medical companies that range field that from in-vitro diagnostics to remote heart monitoring and deep brain stimulation. Of the 65 stocks within IHI, many are for companies that offer medical devices on the forefront of innovation within the healthcare industry.
IHI has an expense ratio of 0.43%. And this ETF has the strongest Morningstar rating of the group at 5 out of 5 stars.
"Add it all up," says Michael. "And you can see why I say that owning a small number of select tech-centric ETFs is more than just a 'safety play.'"
But if you want more than average market returns, buying individual stocks is still the best way to do it.
And we've got a tech stock that has a place in just about every portfolio...