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Is investing in exchange-traded funds (ETFs) worth it? The ETFs invest your money in a pool of stocks, which would require a significant investment if you directly buy these stocks. The stock portfolio will have multiple stocks, and as the price of these stocks fluctuates, the ratio of the stock in the portfolio fluctuates. You get the benefit of the price change as the value of the ETF unit also changes as the overall value of the portfolio changes.
Investing in technology ETFs
Technology stocks are volatile. They can generate remarkable triple-digit growth or fall steeply. There are multiple examples of the technology boom and bust. The cryptocurrency wave of 2021, the e-commerce wave of the pandemic, the artificial intelligence (AI) wave of 2022. Apart from these technology revolutions, there are tech companies with steady earnings.
E-commerce wave
The technology waves have made many investors millionaires, while those late in the game lost money. For instance, the 2020 e-commerce frenzy when lockdowns put all customers on Shopify’s (TSX:SHOP) e-commerce platform. The company had a Black Friday-like sale in April 2020. This growth was not predictable. However, Shopify stock rallied 329% between April 2020 to November 2021. If only you had a crystal ball and could time the stock’s rally, a $10,000 investment could have converted to over $36,000 in little over a year.
However, when the tech stock began its descent on November 16, 2021, it lost 64% of its value by February 28, 2022. Why did it fall? The stock was overvalued and people thought they could never get out of the lockdown, so Shopify is the new way of shopping. However, the news of the COVID-19 vaccine raised hopes that the lockdown would end someday, and they could visit physical stores. Even this wasn’t predictable. If you tried to sell the stock at the end of November, finding a buyer was difficult as everyone was selling the stock. The $36,000 value dropped to $12,900.
An ETF normalizes these returns through regular profit bookings. It keeps buying and selling stocks to rebalance the portfolio to replicate the benchmark index, thereby earning profits for its unitholders. The ETF gives you the benefit of the rally and also mitigates the downside risk.
$10,000 invested in XIT ETF 10 years ago
iShares S&P/TSX Capped Information Technology Index ETF (TSX:XIT) gives you exposure to all high-growth tech stocks trading on the TSX. In the last 10 years, the ETF has earned from the Shopify and Lightspeed rally. It also has a significant 27% holding in Constellation Software, which has grown 958% in 10 years by acquiring vertical-specific software companies. The ETF also benefited from the rally of Celestica, a third-party electronics manufacturer, which benefitted from the AI boom with a rapid surge in server and network switch orders.
The ETF also enjoys stable growth of Descartes Systems, which has been rallying at a 20% compounded annual growth rate (CAGR) for the last 10 years.
While the XIT ETF enjoyed the rally, it took the hit from the sharp fall of Dye & Durham, which fell after the founder resigned and active shareholders took control. The ETF also took BlackBerry’s dip after the Reddit short sale, Lightspeed’s dip from the short-seller report, and Nuvei’s exit from the stock market after the acquisition.
The technology ETF normalized these ups and downs through a diversified portfolio and generated positive cumulative returns.
A $10,000 investment in the XIT ETF 10 years ago in March 2015 is roughly $51,340 now, after deducting management fees and other expenses. The actual returns might be different but will be around the $50,000 figure.
In conclusion
A technology ETF cannot replicate the returns of an individual stock. However, it can diversify your portfolio, normalize the returns, and reduce the risk that comes with individual stocks.
A good strategy is to invest a certain amount monthly in the XIT ETF to benefit from the overall sector performance. It is not a substitute for investing in stocks but can complement your stock investing.
Alongside XIT ETF, you can invest in tech stocks you are confident will grow.