Technology sector has been the best performer among all S&P sectors this year, rising 9.5% year-to-date and handily beating the 5.3% return posted by the broader S&P 500 index. The sector also outperformed other asset classes from gold to real estate.
Tech companies did not participate in the initial post-election rally as they were seen as exposed to the risks of trade wars and anti-immigration stance. At the same time, they were expected to be the big beneficiaries of tax repatriation holiday promised by Trump.
But this year, investors have dialed back expectations for a Trump bump, particularly after the failure of the Healthcare reforms. Financials, which had surged late last year on hopes of higher rates, deregulation and tax cuts, are lagging this year, with sector return less than 1%.
Investors have now turned to companies that will be able to grow their earnings as the economic picture brightens. And with the global economy picking up momentum, technology companies appear best positioned to prosper. They are also less susceptible to interest rates or deregulation.
Further, this is expected to be a strong quarter for tech earnings growth with sector earnings expected to be up +10.7% from the same period last year, per Zacks Earnings Trends.
Mega-cap tech names like Apple (NASDAQ:AAPL) have surged this year, driving the largest, ultra-cheap, broad tech ETFs-like the Technology Select Sector SPDR ETF (NYSEARCA:XLK) and the Vanguard Information Technology ETF (NYSEARCA:VGT), but the best performers this year are some of the lesser known ETFs that track the hottest technology trends. These are some of the disruptive technologies that will shape our futures.
ARK Innovation ETF (NYSEARCA:ARKK)
This is an actively managed product, tracking companies that benefit from innovation, improvements and advancements in one of three areas - industrial innovation, genomics or Web x.0. It follows the investment theme of disruptive innovation.
Tesla (NASDAQ:TSLA), Stratasys (NASDAQ:SSYS) and Amazon (NASDAQ:AMZN) are among the top holdings. The fund is not cheap - it charges 75 basis points for operating expenses, which is in line with some other actively managed niche funds.
Further, it has so far managed to attract only $19 million in AUM, leading to high trading expenses. It is more suitable for investors with higher risk tolerance.
The fund is up more than 20% year-to-date and about 22% since its inception in October 2014.
Global X Social Media Index ETF (NASDAQ:SOCL)
SOCL provides access to a broad basket of social media companies around the world. The social media giant Facebook (FB), which has rallied hard this year, is one of the top holdings.
It has gathered about $89 million in AUM. About half of its assets are invested internationally, mainly in Chinese (27%) and Japanese (9%) companies. Strong performance by Chinese tech giants is one of the reasons behind the ETF's outperformance.
The product charges 65 basis points for fees and has risen about 15% this year.
PowerShares NASDAQ Internet Portfolio (NASDAQ:PNQI)
This ETF tracks the performance of the largest and most liquid US-listed companies engaged in internet-related businesses.
It has risen more than 14% in 2017 and has an expense ratio of 60 basis points. The product has gathered about $317 million in assets so far.
Global X Internet of Things ETF (NASDAQ:SNSR)
SNSR is the first ETF to target the hot Internet of Things (IoT) theme, which has received a lot of attention over the past few years, thanks mainly to the growing appetite for connectivity between the physical and the digital worlds.
The product holds companies that could benefit from the broader adoption of this technology. The underlying index follows a modified market weighting scheme, with a single security cap of 6%. This is an area that will likely see massive growth in the coming years.
This is a relatively new ETF - it made its debut in September last year - and has gathered $38 million in assets so far. It charges 68 basis points for expenses and has risen about 14% year-to-date.
SNSR is up about 14% this year.
First Trust NASDAQ-100 Technology Sector Index Fund (NASDAQ:QTEC)
QTEC follows an equal weighting methodology to provide exposure to the largest NASDAQ-listed U.S. technology stocks.
It's a popular fund with about $1.9 billion in AUM and large trading volumes. However, with expense ratio of 60 basis points, it's much more expensive than largest and most popular tech ETFs. It has risen about 14% this year.
The fund has more than 40% allocation to semiconductors. And while some of the traditional business areas for chips face challenges, like PC sales are slowing down and smartphones sales are becoming flattish, newer growth areas have emerged for chipmakers, including Autonomous Cars, Cloud Computing, Gaming, Wearables and Internet of Things (IoT). That has resulted in continued rally in chip stocks.