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OTTAWA (GlobeinvestorGOLD)—There's a way to play technology stocks that makes science and tech mutual funds seem like taking a shower with your raincoat on. There's no protection from a savvy portfolio manager when you invest in exchange-traded funds that allow you to invest in technology niches like Internet infrastructure stocks, business-to-business Internet and networking. With these ETFs, you're directly wired into whatever your chosen tech sector is doing.
Of course, these sectors tend to do things in a big way. The iShares Goldman Sachs Networking Index Fund surged 180 per cent to $27 (U.S.) over the past 12 months, but then it's coming off a decline to $10 from $40 a few years ago. Just as volatile is the StreetTracks Morgan Stanley Internet Index Fund, which fell 75 per cent in the past three years, even after you factor in a 106-per-cent surge in the past 12 months.
Where do you go for action like this? The American Stock Exchange, mainly. The Amex is home to most U.S. ETFs and it's easily accessible to Canadian investors through any on-line or full-service broker. There's a single tech-oriented ETF listed on the Toronto Stock Exchange—the iUnits S&P/TSX Information Capped Technology Index Fund, or iIT—but this is a broad-based product that holds shares in such companies as Nortel Networks Corp., Celestica Inc., Cognos Inc. and Research In Motion Ltd. There are several Amex-listed ETFs that track broad-based tech indexes, but the most extreme funds zero in on small niches. That's what makes them so interesting, and potentially dangerous.
The iShares Goldman Sachs Networking Fund holds 37 stocks, many of which will be familiar to anyone who recalls the fallen giants of the late-1990s technology stock boom. There's PMC-Sierra Inc., Comverse Technologies Inc., Tellabs Inc., Sycamore Networks Inc., as well as giants like Lucent Technology Inc. and Nortel. StreetTracks Internet holds shares in 24 companies, including Yahoo Inc., Juniper Networks, Amazon.com and Ebay Inc.
Whereas the manager of a science and tech fund might stickhandle his or her way through these stocks to select only the ones with the best prospects, these ETFs give you unalloyed exposure to the gamut of stocks in a particular niche. You can play that exposure on both the up and the down side, by the way, because ETFs are eligible for short-selling.
Some other tech sector ETFs listed on the Amex include:
While vastly more dangerous than tech funds, ETFs like these have one distinct advantage—low cost. While the management expense ratio on a typical tech mutual fund might run as high as 2.8 to 3.5 per cent, tech sector ETFs are typically in the range of 0.50 per cent to 0.65 per cent. You'll especially appreciate this cost advantage when you factor in the potential for a rising Canadian dollar to cut into your returns, which will be in U.S. dollars.
If you decide to play tech sector ETFs, don't forget to use stop-loss orders. This is where you instruct your broker to sell your shares if they fall below a specified price point. Enjoy the ride while these funds soar, but be prepared to bail out when the momentum's gone because the fall just might kill you.
Rob Carrick has been writing about personal finance, business and economics for more than 12 years.