- Tech stocks and ETFs are shares in companies in the technology sector. This includes computer hardware and software, IT, communication, and even AI.
- Tech stocks draw investors in due to their newness, excitement, and innovative approach. But you don’t have to just involve in tech stocks to invest in tech advances (think Tesla and Amazon).
- Due to high demand, tech stocks offer great growth potential – at high risk and (often) even higher prices.
- One of the best ways to get involved in tech stocks as an individual is to invest in tech-based ETFs and other funds. But online platforms provide new ways to invest in individual tech shares.
The tech sector is enormous. When you talk about “tech stocks,” companies like Microsoft, Apple, and maybe even Netflix probably spring to mind. But the tech sector is much more than consumer goods. When you talk about tech, you’re broadly referring to an industry comprised of sectors like the following.
- Consumer and industrial electronics
- Information technology (IT)
- Artificial Intelligence (AI)
- Blockchain (such as Bitcoin)
- Internet of Things (IoT)
In short, almost any business that engages in the research, manufacture, maintenance, repair, or distribution of physical electronics (hardware) or codes and platforms (software) may fall under the umbrella of “tech.” And this means that picky investors have a plethora of options from which to choose.
Why Invest in Tech
Tech stocks are known for attracting investors of all stripes, from novices to the highly experienced. The basic premise is simple. Tech companies offer newness, excitement, and innovation that other industries simply can’t match. And as they look to the future with new technologies and platforms, their stocks tend to charge upward in the market (at least for a time).
But it’s not just new inventions and big ideas that draw investors. Investing in tech also gives individuals a chance to invest in brands that play a major role in their lives. (Who among us doesn’t own a computer, smartphone, or at least a streaming media account?)
At the same time, tech stocks offer unique opportunities for growth, income, and value strategies. In the same share. For instance, investing in a mature tech company like Apple will not only generate dividends. It’ll also likely lead to both short- and long-term growth. And for those seeking greater bursts of short-term growth, there’s an ever-expanding field of younger, more exciting capital ventures (at higher risk).
Some investors also like to invest in technology because they’re not just investing in technology. Take Tesla, for instance. While Elon Musk’s brainchild is not categorized as tech, it relies on fast-paced innovation to differentiate its vehicles, batteries, and solar solutions. Or Netflix, the streaming media giant that has sprawled leisurely into the production space to feed content into its platform. And then, of course, you have Amazon. An enormous online retailer, forward-thinking technology engineer, and cloud hosting service in one.
Big Names in Tech
Some investors seeking their riches in tech focus on seeding capital investments to small, innovative startups. That startups looking to disrupt an enormous industry. But startups – though numerous – aren’t the only avenues to success.
For the average investor, gravitating toward high-growth powerhouses often makes more sense. As the 21st century’s bull market has raged on, tech stocks have led the forward charge with gusto. As a result, the largest tech investments have consistently outperformed the S&P 500 over the past decade – in fact, the top five members of the S&P are some of the most familiar names in tech:
- Alphabet (Google)
And then, of course, you have other giants such as NVIDIA, AMD, Netflix, and PayPal – among dozens of others – that fall into the category of high-growth tech stocks, too. While these companies vary in product and industry, they share one thing in common: each hit respective all-time highs during 2020 due to the explosion of stay-at-home work (and play) around the globe.
But if you prefer to focus on consistent, long-term growth while minimizing the volatility that individual stocks bring, there are plenty of high-performing ETFs to select from, too, including:
- The Vanguard Information Technology ETF (VGT) with $47 billion AUM and more than 425 securities.
- The Technology Select Sector SPDR Fund (XLK) with $39.6 billion AUM and around 70 securities.
- The iShares U.S. Technology ETF (IYW) with $7.1 billion AUM and more than 150 securities.
Each of these ETFs focuses broadly on the tech market, with most of their assets falling into the giant and large-cap range. Furthermore, they all boast consistent, long-term growth over the last decade. By investing the majority of their assets into mature companies and dabbling in smaller investments, the funds offer a small buffer against the volatility inherent in the tech market.
Considerations When Investing in Tech
According to Fidelity, the Communication Services sector (which includes telecommunication, entertainment, and interactive media) has experienced almost 91% growth over ten years, and 64% in the last year. Likewise, the Information Technology sector (which includes communications, electronics, IT, semiconductors, software, and hardware) has grown by over 482% in ten years, and just under 65% in the last year.
But strong returns come with significant risks. Technology, by definition, is ever evolving and advancing. Even a small disruption can ripple through the industry and send one-time leaders scrambling to catch up. And if promising new companies can’t hack the corporate world, they can fade into oblivion as quickly as they arrived.
Emerging Vs Mature Companies
You can divide most tech companies into one of two groups: emerging brands and mature companies. The first group includes all the tech startups housed in parents’ basements around the world – a handful of which may succeed, but most of which won’t.
On the other hand, mature companies such as Microsoft, Intel, and Netflix are well-established in the market. While they still have to innovate to remain relevant, their baseline products are entrenched in society – and your memory. Furthermore, they typically have steady revenues and a history of solid performance (especially compared to emerging brands).
However, due to the growth-based focus of tech companies, both groups embody high levels of risk. The tech sector is known for being volatile due to rapid innovations and high investor expectations – just look at the dot-com bubble and, more recently, Bitcoin. While investing in mature companies can assuage some of these risks, there’s still a chance that you could lose your investment.
Risks and Rewards
Equity investors in particular may view tech as high-risk due to their forward-facing growth. Tech companies often build future growth into their current valuations. In other words, tech shares are often priced on the promise of future earnings or products, rather than the current reality. In cases where the issuing company can’t make good on their promises, the bottom can drop out of their stock overnight.
However, some well-established companies attempt to offset these risks by offering dividends in addition to the allure of rapid growth. Some of the biggest names in tech are actually dividend aristocrats – members of the S&P 500 that have increased dividends annually for at least 25 consecutive years. And some companies that weren’t big enough to offer dividends 25 years ago (think Apple and Netflix) certainly offer them now.
However, as tech stocks are inherently growth stocks – companies that funnel profits into R&D – don’t expect all of them to offer dividends to shareholders. It’s simply not in the name.
Types of Tech Investments to Start Investing in Tech
Some analysts, when talking tech, are exclusively referring to the “elite” amongst the innovators: Facebook, Amazon, Apple, Netflix, and Google, or FAANG. (You may also have heard of FANGMAN, which throws Microsoft and NVIDIA into the pile, too.) These stocks are the blue-chip companies of the tech sector – large, well-established, with strong financial histories and plenty of growth yet to come. For individual investors, these companies are often favorite picks.
But when it comes to investing in tech, looking beyond the elites helps diversify your portfolio and may even lead to higher returns. To that end, it helps to consider tech investments by industry and gain an idea of your options.
Software involves business, enterprise, and consumer platforms and installable applications. 2020 was a boon for many software purveyors due to the sudden influx of work-from-home arrangements. But even in non-pandemic years, established and essential software companies enjoy steady growth – think Microsoft, Adobe, and Salesforce.
The hardware sector covers those who manufacture, sell, and repair computers, smart devices, printers and scanners, televisions, and related components. Different facets of the hardware sector perform at varying levels; just look at HP’s struggling printer division against Apple’s significant growth. Other major players in the field include Sony, Samsung, Dell, and Panasonic.
Telecommunications encompasses all the companies that participate in a massive game of global telephone, including phone and broadband networks. But while telecom often presents stability, that’s not always the case; the sector has seen some negative growth in recent years. Some of the biggest names include giants like AT&T, Verizon, and Deutsche Telekom.
Semiconductor stocks are issued by companies that produce the semiconductors and computer chips in consumer devices, as well as industrial technologies. Due to their versatility and the market’s need for these products, they often produce stability and significant returns. However, production concerns, global politics, and supply chain issues can affect their performance in short-term stints. You’re probably familiar with NVIDIA, Intel, and AMD, but other notable examples include Qualcomm and Texas Instruments.
Blockchain technology recently received a lot of hype when Bitcoin shot up over $50,000, led by a spike in investor interest and a few well-timed tweets by Elon Musk. This area of the market is new, volatile, and largely unregulated – and that’s what some investors like about it.
Blockchain technology is a decentralized method of generating and using currency, completely bypassing banks (and governments) in an effort to remove third-party interference from the economy. While the future of blockchain technology is uncertain under recent scrutiny, some investors think it’s still worth the risk.
Artificial intelligence is a newer sector in tech that comprises deep learning, machine learning, and other instances of computers performing non-mathematical tasks. You may be most familiar with Amazon’s Alexa or Apple’s Siri as AI. Forbes holding Q.ai uses AI to run models and calculations of investments to determine the best place to put your money for long-term growth.
Where to Start Investing in Tech
When it comes to investing in tech, you can get started in a few ways. The most obvious is to buy individual shares via a broker or online investment platform, such as Robinhood, Fidelity Go, Acorns, or SoFi Invest, among others. Traditional stockbrokers also offer online platforms now, such as TD Ameritrade and Charles Schwab.
Investing in stock ETFs is another increasingly popular option, as it allows you to spread your risk and hold a few more securities in one go. Plus, you typically need less starting capital to invest – tech shares often price in triple and quadruple digits, whereas you can invest smaller dollar amounts into an ETF.