The technology sector was a major driver of market growth in recent years but stumbled in 2022. The rise in interest rates and high inflation of that year, along with earnings misses from U.S. and Canadian tech giants have negatively impacted the sector.
As interest rates rose, the increase in borrowing costs made it more expensive for technology companies to access capital, while the economic uncertainty created by the high inflation led to decreased consumer spending and reduced demand for technology products and services.
In addition, the high weighting of faltering tech giants like Meta, Netflix (NASDAQ:NFLX), and Shopify (TSX:SHOP) in U.S. and Canadian stock market indexes meant that their earnings misses had a significant drag on the overall technology sector, which further harmed investor sentiment.
Despite these challenges, the technology sector remains an attractive opportunity for investors who are able to stomach high volatility. Many companies in the sector still possess ample war chests of cash and robust, profitable margins to weather the current storm.
The long-term growth potential of the sector remains strong, and many technology companies have been able to successfully adapt to the changing market conditions either by investing in new products and services (as Microsoft (NASDAQ:MSFT) and Google did with AI) or improving their cost structures via cost-cutting in the form of sweeping layoffs.
For Canadian investors who are willing to take a long-term perspective and are able to weather short-term volatility, investing in technology ETFs may offer compelling, diversified opportunities for targeting long-term sector growth.
iShares S&P/TSX Capped Information Technology Index ETF (TSX:XIT) XIT
Canadian investors who wish to express a bullish view on the comparatively small Canadian technology sector can use XIT. This ETF tracks a concentrated portfolio of 26 Canadian equities in the technology sector, subject to a 25% cap on the individual weights of any company.
The ETF is very top-heavy, with Shopify and Constellation Software accounting for 50% of the ETF's total net assets. As such, volatility within those two stocks tends to have an outsized impact on XIT. Investors looking for greater diversification may not like this approach.
Despite its passive index structure, XIT still charges a relatively high management expense ratio (MER) of 0.61%. Unfortunately, this is somewhat normal in the Canadian ETF industry, where sector ETFs tend to charge much higher fees compared to broad-market ETFs.
Evolve FANGMA Index ETF (TSX:TECH) (TECH)
Investors interested in U.S. technology stocks often default to the various NASDAQ 100 ETFs on the Canadian market, but these ETFs don’t provide pure-play exposure. A more focused alternative would be TECH, which provides exposure to an equally weighted portfolio of six mega-cap U.S. companies.
As its name suggests, TECH invests in the FANGMA cohort via the Solactive FANGMA Equal Weight Index, which consists of Facebook (NASDAQ:META) (Meta), Apple (NASDAQ:AAPL), Netflix, Google (Alphabet (NASDAQ:GOOGL)), Microsoft, and Amazon (NASDAQ:AMZN). The ETF is currency hedgedand charges a 0.45% MER
The main benefit of the ETF is capital efficiency and accessibility. It costs much less to purchase one share of TECH than it does to purchase an equal amount of all six FANGMA stocks. Buying TECH also alleviates investors of the need to convert CAD to USD to purchase the FANGMA stocks directly.
TD (TSX:TD) Global Technology Leaders ETF (TSX:TEC)(TEC)
The most popular Canadian listed technology sector ETF is TEC, which currently sits at around $1.3 billion in assets under management (AUM). At the height of the 2020-2021 technology sector run, TEC was one of the most talked about Canadian ETFs online on Reddit.
TEC tracks the Solactive Global Technology Leaders index, which as its name suggests holds global technology sector equities. In practice, the ETF is dominated by U.S. technology sector stocks at 83.9% of the ETF's net assets due to the market-cap weighting methodology.
Outside of its U.S. holdings, the rest of TEC is held in European (7.90%) and Japanese (5.10%) technology stocks. Canada sits at just 0.90%, a testament to the comparatively small size of our technology sector. TEC charges a reasonable 0.39% MER, which is coincidentally the same as many NASDAQ 100 ETFs.
This content was originally published by our partners at the Canadian ETF Marketplace.