ETF Talk: Investing in the IT Matrix

Doug Fabian

Doug Fabian is known for his expert knowledge of ETFs, bear funds and enhanced index funds to profit in any market climate.

While the last couple of ETF Talks have focused on location-based technology exchange-traded funds (ETFs), this week’s write-up will target a key part of the industry: information technology.

In this age of communication, conveying information increasingly faster and more efficiently is of paramount importance. And an ETF that follows this trend is the Vanguard Information Technology ETF (VGT).

This non-diversified fund tracks an index which invests in companies in both the United States and in the information technology sector. Last year, VGT rose 12.61%, and the fund is following up that impressive growth with gains of 6.05% so far this year. This ETF also has a 1.14% dividend yield.

Though these numbers look good, timing should be a factor in your decision to invest. As I have mentioned in previous weeks, right now it is far better simply to observe technology stocks than to invest in them, as these shares tend to fall as temperatures rise in the summer.

As VGT is a technology ETF, 87.54% of its assets are invested in the technology sector. As with previously discussed technology ETFs, the balance resides in various “supporting” sectors which either can help or be helped by information technology: financial services, 4.88%; industrials, 4.59%; consumer cyclical, 2.32%; communication services, 0.60%; basic materials, 0.06%; and consumer defensive, 0.01%.

VGT’s top ten individually held companies comprise 58.02% of the fund’s assets. Most of that 58.02% of the holdings stems from VGT’s heavy investment in Apple Inc. (AAPL). Indeed, Apple accounts for 17.27% of the fund’s holdings. The other companies in this ETF’s top five holdings are recognizable names to the computer-savvy consumer and have somewhat smaller shares of the fund’s holdings: International Business Machines (IBM), 7.19%; Microsoft Corporation (MSFT), 6.97%; Google Inc. (GOOG), 6.42%; and Oracle Corporation (ORCL), 4.50%.

As the realm of information technology should continue to prosper in this age of communication, expect funds like VGT to reap that success. And with the household names in its holdings having the potential to advance this year, with Apple’s expected new products and Google’s innovation, this ETF could do very well. However, due to technology’s traditional summer slump, I recommend holding off on investing in VGT until the fund troughs and resumes rising.

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Meanwhile, if you want my advice about buying and selling specific ETFs, including appropriate stop losses, please consider subscribing to my Successful Investing newsletter. As always, I am happy to answer any of your questions about ETFs, so do not hesitate to email me by clicking here. You may see your question answered in a future ETF Talk.

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