The tech sector has been red-hot in recent months thanks to its inherent strength, increased adoption of emerging technologies and the announcement as well as the signing of the U.S.-China phase-one trade deal. Technology Select Sector SPDR Fund (XLK - Free Report) was up 51.6% in the past year, gained 19% in the past six months and has advanced 4% this year.
Even escalation in U.S.-Iran tensions to start 2020 could not take a bite of the sector’s rally as investors wagered big on tech companies that focus on threat-detection services. Cloud-computing and cybersecurity stocks, in fact, gained a lot on the Middle East crisis (read: 5 Tech ETFs Riding High on Iran Tensions).
Not only higher demand for technologies, the sector is also known for investors’ value maximization. Notably, the tech corner of the S&P 500 Index made maximum share repurchases — worth $1.37 billion in the past 10 years and $871.6 million in the past five years (read: 4 Sector ETFs Sizzling With Solid Buybacks).
Cloud computing and artificial intelligence will keep ruling the technology sector, with 2020 likely to be a breakout year for edge computing, per Deloitte. The sector carries a Zacks Rank #2. The thesis makes it intriguing for continued bets on technology ETFs.
Why Low Expense Ratio Funds Are Better
While there are a number of factors that investors consider before investing in ETFs, cost is an important factor that drives their investment decision. In the long run, cheaper funds can handily outperform expensive ones, at least when other factors remain constant.
Consider an expense ratio of 1%, a fund of $10,000 invested at 8% annual return will grow to $19,672 in 10 years, while the same fund invested at an expense ratio of 0.1% will grow by a higher amount of $21,390. The difference between the returns will keep zooming out, increasing the holding period.
Considering the same parameters, with an expense ratio of 0.1%, a fund of $10,000 will grow to $97,869 in 30 years (at the same 8% rate of return). The same fund will however grow to a much lesser value of $76,123 with an expense ratio of 1%.
The price war among issuers has intensified of late owing to rising competition. For a long period of time, the lowest cost corner was ruled by Charles Schwab and Vanguard. But now other players like State Street BlackRock are resorting to fee cuts to grab market share.
Against such a backdrop, we have highlighted five tech ETFs with ultra-low expense ratios that can be considered at the current operating backdrop.
Fidelity MSCI Information Technology Index ETF (FTEC - Free Report) – Expense ratio (ER) 0.08%, Zacks Rank #1 (Strong Buy)
Vanguard Information Technology ETF (VGT - Free Report) – ER 0.10%, Zacks Rank #1 (read: Apple at All-Time High, Poised for an Upbeat Q1: ETFs to Benefit)
Technology Select Sector SPDR Fund (XLK - Free Report) – ER 0.13%, Zacks Rank #1
iShares Evolved U.S. Technology ETF (IETC - Free Report) – ER 0.13%
Invesco S&P SmallCap Information Technology ETF (PSCT - Free Report) – ER 0.29%
Defiance Next Gen Connectivity ETF (FIVG - Free Report) – ER 0.30% (read: 9 Successful New ETFs of 2019)
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