Given the high historical returns of the technology sector, many investors are naturally inclined to invest in the technology sector. The tech-heavy Nasdaq-100, commonly invested through ETF QQQ, outperformed the S&P 500 between December 31, 2007 and March 31, 2021. Nasdaq-100’s cumulative total returns were approximately 2.5 times that of the S&P 500.
The technology sector is vast, but five technology giants should be familiar to most of us — Facebook, Apple, Amazon, Netflix and Google (Alphabet), forming the famous group of FAANG stocks. While we may be most familiar with these companies, as most of their services are heavily integrated into our daily lives, there are other noteworthy names that registered significant growth over the pandemic.
Impact of COVID-19 on our lives and the technology sector
The COVID-19 pandemic has accelerated the digitalisation of business processes and consumer behaviours. The “new normal” of remote learning and working has increased our reliance on technology, as we find our work, socialisation, shopping, and entertainment all online. Compared to before the pandemic, businesses are three times more likely to say that most of their customer interactions are digital in nature.
As more companies pivot online or innovate digitally, the technology sector will continue to have an increasing number of innovative companies worth investing in. Technology companies that grew exponentially during this period include many winners. Zoom experienced high sales growth of 370% in Q4’20 compared to Q4'19. Similarly, Shopify, an e-commerce platform with 2Q’21 revenue rising 47% against the same period last year as brick and mortar businesses go online. The paradigm shift to a digital economy is expected to have long-term impact on businesses.
Are FAANG stocks the only way to invest in technology?
Where investing in technology is concerned, most investors naturally gravitate towards the popular FAANG companies. Historically, investing in FAANG companies has been profitable with lowered risk. They have since become well-established tech giants with sizable market shares. Taken together, they account for around 17% of the S&P 500's market cap, and 36.6% of Invesco QQQ’s holdings.
However, only investing in FAANG, or even limiting to the Hang Seng Tech index may be limiting your growth potential in the technology sector. There are several industry-leading tech companies in the various sub-sectors of technology that present opportunities for investors interested in the sector. Companies such as TSMC, Shopify, and Salesforce are leaders in the semiconductor manufacturing, e-commerce, and software as a service (SaaS) sub-sectors respectively. These companies have demonstrated high growth historically.
These sub-sectors also have significant growth prospects as the world increasingly goes digital. Businesses would require SaaS and cloud services, healthcare professionals would need to tap on next-generation genomics to treat diseases, and artificial intelligence would be essential to power self-driving vehicles.
Business sectors outside of technology will also be pressured to keep abreast of digital transformation, such as retail, transport, and financial sectors. These sectors present additional opportunities for investors to invest in tech, albeit indirectly, while diversifying exposure.
Other than well-known heavy weights, smaller tech companies are also driving technological innovation. Smaller companies are able to tap into markets and sectors often overlooked by bigger companies, and are later on acquired by the mega cap companies themselves. Google have acquired smaller tech firms such as Fitbit, Deepmind Technologies, Waze at high valuations for business synergies.Allocating your portfolio to these smaller companies open you to more opportunities to be exposed to the multi-bagger gains in these portfolios
Getting started with Technology investments
There are many different ways to get exposure to technology companies and stocks. Most investors will choose to pick individual companies, or invest in technology ETFs such as KWEB or unit trusts to enjoy the growth potential of the tech sector. The approach can differ significantly from one to another but there are clear pros and cons of each that should help you decide where to start.
Individual stock picking
With the tech stock market rife with hot stock tips from novice investors to day traders, investors are more distracted than ever with farfetched performance projections on Reddit and other forums. Coupled with an emerging ecosystem of brokerage apps, investors can invest in individual tech companies, such as Tencent, Nvidia, or Tesla at their fingertips. However, successful stock picking may be fairly challenging to the novice investor, despite the easier access
Pros of picking individual tech stocks:
- Get direct exposure to single tech companies’ growth
- Pay potentially less fees as there are no fund managers involved
Cons of picking individual tech stocks:
- Potentially time consuming: need to research which company to invest in, and monitor company and sector related news to ascertain if company prospects remain attractive, and need to conduct fundamental analysis on the company’s financial statements as well as future plans.
- High volatility of single tech stocks make it harder to have a long term view of the company
Technology ETFs
Investing via a technology ETF, such as Vanguard Information Technology ETF (VGT) or ARK Next Generation Internet ETF (ARKW), or Hang Seng Tech Index (HKG: 3032) may be a simpler way to invest in technology companies. By investing in tech ETFs, investors are investing in a diverse range of tech companies, thereby mitigating standalone risks. ETFs also allow investors to ride major industry trends.
Pros of investing in tech ETFs:
- Get more diversified exposure into technology companies
- Spend less effort to manage the investments
Cons of investing in tech ETFs:
- Necessary to understand the different tech ETFs investment mandate
- Necessary to consider dividend withholding tax and FX considerations
Technology mutual funds or unit trusts
In comparison to ETFs, most technology mutual funds are actively managed. Fund managers are able to make discretionary top-down portfolio adjustments quickly in response to industry changes. This allows them to potentially ride on new opportunities and mitigate risks. Fund managers also conduct bottom-up fundamental analysis of the different tech companies, allowing them to select the firms with the highest growth potential to invest in.
Pros of investing in tech mutual funds:
- Diversification within the technology sector can offset volatility concerns
- Active management of a mutual fund means that the fund is able to react quickly to market trends and opportunities
- High growth trajectory of the tech sector allows for higher-than-average returns
Cons of investing in tech mutual funds:
- Potentially high expense ratios and sales charges
- An experienced fund manager is required to navigate the fast-moving sector and capture returns
Interested in investing beyond FAANG, or even beyond the tech sector? Open an account in Endowus and learn more about investing.
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Risk Warnings
Investment involves risk. Past performance is not an indicator nor a guarantee of future performance. The value of investments and the income from them can go down as well as up, and you may not get the full amount you invested.
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