Exchange Traded Funds are an efficient, lower-cost way to invest in tech sector.

As market analysts watching soaring tech share prices warn of an impending tech bubble, is technology still worth investing in? And why should investors consider Exchange Traded Funds (ETFs) for their tech exposure?

In basic terms, technology is scientific application for practical purposes or the development of equipment and machines from scientific knowledge. 

We deal with technology so often that we barely notice how vast and all-encompassing it is. Every company in every sector uses or benefits from some form of technology. 

Investors in technology usually focus on single companies or, if looking at funds, sector, or thematic exposure. 

The sector classification is often considered a “pure” exposure in that companies deemed to be in the “information technology” sector generate the bulk of their revenue from hardware, software, and IT services. 

Microsoft would be classified within this sector due to generating most of its revenue through software and computer sales, whereas Facebook would not because it generates the bulk of its revenue through advertising. 

For example, an investment like ETFS Morningstar Global Technology ETF (ASX: TECH), which invests in global information technology companies, would be considered a sector exposure.

Tech diversification vital

Thematic exposure is more about investing in themes or trends. Many of the companies investors deem as “tech” might not fit the sector classification but match the theme instead. 

In this instance, Facebook is viewed as a thematic tech exposure because it generates its revenue from the trend towards online connectivity, which extends to digital advertising. 

For example, investments like ETFS FANG+ ETF (ASX: FANG), which follows virtual connectivity and consumer trends, or ETFS ROBO Global Robotics and Automation ETF (ASX: ROBO), which follows the robotics and Artificial Intelligence (AI) trend, would be considered thematic exposures.

Where analysts talk about tech bubbles, they are often not talking about all forms of technology, but rather a specific industry or niche – think the dot.com bubble of the past – and the bubble is created from the company fundamentals being below company pricing. 

Tech bubbles also occur at times of maximum innovation and change so there will still be winners from these situations. Amazon survived the dot.com crash while others did not. 

From an investor perspective, this does not mean avoiding all tech investment, but rather being selective about how and where to invest. This is where ETFs can be valuable in allowing investors to spread the risk across a range of companies where it may be harder to predict the winners or losers.

Australian investors can be underexposed generally to technology companies – they only represent 4% of the ASX (i) compared to 21.27% of the MSCI World Index (ii), with Australians typically heavily exposed to financials instead. 

That said, while small, the Australian technology industry is no slouch in the innovation stakes, with companies like Afterpay (ASX: APT) and Atlassian innovating and disrupting the market. 

Strong growth ahead

Technological advancement is the key driver behind some of the biggest megatrends of our time, such as virtual connectivity and digitisation, automation, robotics, and biotechnology. We increasingly rely on technology and with nearly 60 per cent of the world’s population estimated to be internet users (iii), this is unlikely to change. 

In fact, the COVID-19 pandemic may have accelerated our dependence, with many in lockdown depending on cloud storage and video conferencing for employment and others heavily accessing online shopping and entertainment.

In coming years, the roll-out of the 5G network is expected to further transform the world, for example, supporting the automation of global supply chains or home activities. It is predicted that around 500 billion devices will be connected to the internet by 2030 (iv). 

Technology is also the key to our ongoing battle to cure and prevent diseases. Biotechnology has come to the fore in the COVID-19 pandemic – it refers to technologies that use biological processes, capturing companies that focus on research, development, manufacturing and/or marketing of products based on biological and genetic information. 

Biotech is a growth industry predicted to be valued at more than US$729 billion by 2025, compared to US$295 billion today (v). Biotech growth will be driven by an increasing global population and the need for affordable, effective treatments and vaccines. 

Even our focus on moving to sustainable and renewable forms of energy, be it to power our homes, offices, or our transport, is supported by technology, from the creation of solar cells to power storage in the form of batteries. 

In the next five years, the market for battery technology is anticipated to reach $90 billion (vi) and the Tesla-built Hornsdale Power Reserve has supported South Australia in achieving 50.5% of its energy needs via solar and wind generation (vii).

Features of tech ETFs

(Editor’s note: Do not read the following ideas as ETF recommendations. Do further research of your own or talk to a financial adviser before acting on themes in this article).

While investors can access exposure to technology in a range of ways, ETFs can be an efficient means, via a single trade.

Direct share investing in tech can be difficult in a few ways – for Australian investors, the technology sector is relatively concentrated, making it difficult to manage risk through diversification. 

Buying international tech shares directly may be hard and costly for some investors. From this perspective, managed options can appeal, in particular tech ETFs.

ETFs can offer cost-effective exposure to a large number of companies, including the “big tech names” that may otherwise be outside financial reach.

Diversification across a large number of companies can be particularly important as a risk-management strategy in more niche technology industries such as robotics and automation, or more high-risk industries like biotechnology. 

This can be achieved through investments such as ETFS ROBO Global Robotics and Automation ETF or the ETFS S&P Biotech ETF (ASX: CURE). ETFs usually have lower fees than actively managed funds. 

ETFs are typically transparent, easy to use and liquid, allowing investors to see what they hold and trade as they need. For investors keen to incorporate specific companies, such as Apple, being able to see the exact holdings of an ETF can be helpful.