Apple Inc. (AAPL), Microsoft Corporation (MSFT): Investing in Technology ETFs

This doesn´t mean that completely avoiding the tech industry is the right thing to do, on the contrary, both Apple Inc. (NASDAQ:AAPL) and Microsoft Corporation (NASDAQ:MSFT) are still very profitable companies, and they are now trading at historically attractive valuations. If they manage to reignite growth via new and successful products, these tech titans could deliver big fat returns for shareholders in the middle term.

The same goes for other companies in the industry: trends like mobile, cloud computing, e-commerce and social networks, to name a few noteworthy examples, will provide enormous opportunities for growing profits over the years to come.

The point is that investing in individual companies is particularly risky in the tech business due to ever changing industry dynamics and an aggressive competitive landscape. Some investors may prefer a diversified approach to the sector by investing in ETFs as opposed to picking specific stocks in the industry. This provides lower upside potential when compared to finding the individual winners, but it also limits downside risks in case things don´t go as expected.

Technology ETFs

With almost $37 billion in assets, PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ) is the biggest and most popular tech ETF by a wide margin. The fund tracks the Nasdaq 100 Index, which represents the biggest 100 non-financial stocks in the Nasdaq Composite; in addition to heavy exposure to tech companies this ETF also includes some consumer discretionary and biotech companies in its portfolio. The expense ratio of 0.2% is quite reasonable, but still higher than the costs offered by competing products.

Technology SPDR (ETF) (NYSEARCA:XLK) has assets under management of nearly $11 billion, considerably below the Power Shares fund, but still providing more than enough liquidity for most investors. This ETF tracks the technology sector of the S&P 500 index, and it holds 77 companies, representing mostly large-cap tech stocks. The fund has an expense ratio of 0.18%.

The low cost leader is Vanguard Information Technology ETF (NYSEARCA:VGT), which tracks the MSCI US Investable Market Information Technology Index. This ETF is smaller than its peers with $3.3 billion in assets under management, but it charges a lower expense ratio of 0.14%. The fund invests in a big portfolio of more than 400 companies but, just like the other two ETFs, it’s heavily concentrated among the biggest industry players.

The three ETFs are market-cap weighted, which means that giants like Apple Inc. (NASDAQ:AAPL), Microsoft Corporation (NASDAQ:MSFT) and Google represent a big proportion of assets in the three cases.

Bottom Line

The decision of going with ETFs or individual stocks should ultimately depend on aspects like the investor´s risk tolerance and general investment strategy among other things. For those who find individual tech companies too risky, but still want to invest in many of the most exciting growth stories of our time, technology ETFs represent a smart possibility to consider.

Andrés Cardenal owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and Microsoft. Andrés is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article The Case for Investing in Technology ETFs originally appeared on Fool.com is written by Andrés Cardenal.

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