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The 2022 bear market was particularly hard on the technology sector. As one of the 11 market sectors as defined by MCSI’s Global Industry Classification Standard (GICS), tech stocks have outperformed the market over the last few years as interest rates remained low.
Innovative companies Nvidia, Tesla, Apple, Microsoft, and Alphabet punched above their weight, leading the tech sector to the top of the S&P 500 index’s weightings at a 28% allocation. However, the rising interest rate, and inflationary environment of 2022 sharply reversed this trend in a manner reminiscent of the 2001 Dot-Com bubble, with stocks like Meta, Netflix, and Zoom plummeting from all-time highs.
Still, technology stocks, and in particular, technology ETFs remain a popular choice for Canadian investors seeking riskier, high-growth potential investments. Inflows remain fairly steady even despite recent market volatility. Today, I’ll be profiling three Canadian ETFs that covered domestic, U.S., and global tech stocks respectively.
Canadian Tech Sector
The Canadian stock market is dominated by the financial, energy, and industrial sectors at 36%, 17%, and 12% respectively. Our tech sector only comprises around 6% of the S&P/TSX 60. After Shopify fell significantly in share price (and thus market cap) throughout 2022, no tech sector stock was left standing in the top 10 holdings of the S&P/TSX 60 Index.
Canadian investors who wish to “tilt” their portfolio towards domestic tech stocks can do so via the iShares S&P/TSX Capped Information Technology Index ETF (XIT). This ETF is passively managed, and holds a concentrated portfolio of 25 Canadian tech stocks weighted by market capitalization. XIT is “capped” in that no single holding can exceed 25% of the ETF by weight.
The top two holdings, Shopify and Constellation Software account for 51% of the ETF combined, making it very top-heavy. The next largest holding is CGI at 15.5%. Personally, I would have preferred an equal-weight allocation to Canadian tech stocks. Having the holdings so concentrated in two stocks isn’t the best for diversification. The expense ratio is fairly average for a thematic fund at 0.61%.
U.S. Tech Sector
A popular way of gaining exposure to U.S. tech stocks is via the NASDAQ 100 index, which tracks the 101 largest non-financial sector stocks listed on the NASDAQ exchange. In recent years, this index has become very tech-heavy, with 50% of its holdings being tech companies, and another 18% being communications sector companies which are sometimes interchangeable.
A way for Canadians to buy the NASDAQ 100 without converting CAD to USD and buying U.S. listed ETFs is via the BMO NASDAQ 100 Equity Index ETF (ZQQ). If you’re looking for MANGMA (Meta, Apple, Netflix, Google, Microsoft, Alphabet) exposure, ZQQ is a good option, as all are represented heavily in its top holdings. In terms of fees, ZQQ is fairly cheap, costing an expense ratio of 0.39%.
Because ZQQ trades in CAD, but its underlying stocks trade in USD, changes in the USD-CAD exchange rate can potentially alter its returns and add additional volatility. ZQQ is currency hedged, meaning that it uses futures contracts to mitigate foreign exchange risk at a slight cost. For a more in-depth discussion of currency hedged vs. unhedged ETFs, give this article a read.
Global Tech Sector
Investors looking for a pure-play tech stock tilt with maximum diversification can consider the TD Global Technology Leaders Index ETF (TEC), which passively tracks the Solactive Global Technology Leaders Index. Now, TEC is still rather U.S. heavy, and that’s an unavoidable consequence of it being market-capitalization weighted. International stocks comprise around 13% of the ETF.
Notable international stocks include Sony, Nintendo, Alibaba Health Information Tech, and Sumitomo Electric Industries. Most of the international holdings come from either Europe (7%) or Japan (4.3%). If you want to invest in tech, there’s really no way of avoiding the U.S. tech sector as the bulk of companies and thus sources of return come from there.
TEC debuted in 2019 but quickly became popular among Canadian investors due to the lack of pure-play global tech ETFs. For example, ZQQ only holds 50% tech stocks, with the remainder coming from a smattering of sectors like consumer staples and industrials. TEC has grown to $1.38 billion in assets under management, and charges a reasonable expense ratio of 0.39%, the same as ZQQ.
Disclaimer: This article is limited to the dissemination of general information pertaining to investment strategies and financial planning and does not constitute an offer to issue or sell, or a solicitation of an offer to subscribe, buy, or acquire an interest in, any securities, financial instruments or other services, nor does it constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment.
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