Why This ETF Is My Number One Recommendation for New Investors

There have been record numbers of new investors entering the market in the past two years, fueled by a variety of factors, not least of which is the greater ease and lower cost of doing so.

According to a recent survey by Investing.com, 86% of new investors in 2021 plan to increase their stock holdings in 2022, not scared off by the fact the market has been down sharply since last November.

Not overreacting to market volatility is indeed a good lesson already learned. The market downturn has brought down valuations of many high-quality companies, making it a good time to buy. Given the fact most new investors are younger and unafraid to take more risky positions, according to the survey, there’s one exchange-traded fund in particular that jumps out as a great option for new investors — the Fidelity MSCI Information Technology Index ETF (NYSEMKT: FTEC).

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Investing in a broad swath of the IT market

The Fidelity MSCI Information Technology Index ETF is not a small fund by any stretch of the imagination with some $6.4 billion in net assets. But it’s far less popular than its larger rivals, the Vanguard Information Technology ETF and the Technology Select Sector SPDR Fund, which are each hovering around $50 billion in assets. All three are great funds, but let’s look at why the Fidelity fund may be the best option for a new investor.

The Fidelity ETF tracks the MSCI USA IMI Information Technology 25/50 Index, one of the broadest benchmarks used for technology-sector ETFs. The IMI in the index’s name stands for “investable market index,” which means it draws from the entire universe of IT — large, mid, and small-cap names. Then, it applies certain limits and screens to ensure diversification. The result is a fund that holds about 367 stocks, including software companies, information technology firms, and technology hardware and equipment companies.

However, it does not include three notable names — Amazon, Meta Platforms, and Alphabet — as they are categorized as communication services or retailers. But it does include Apple, Microsoft, and Nvidia — its three largest holdings.

Why this ETF stands out for new investors

There are a few primary reasons why this ETF stands out for new investors. It invests in a sector that has produced some of the best long-term returns on the market: technology. If you’re a new investor and have a long time horizon for your holdings, you can afford to be more aggressive and invest in a sector that may have more short-term volatility (see the current market) but typically produces excellent long-term returns.

This ETF, which launched in 2013, has returned 21.9% per year since its inception, as of Feb. 28. Over the last five years, it has returned 25.5% on an annualized basis. And in the past 12 months, as of March 31, it’s up 18.2%, despite shedding over 9% year to date. Those are very good results, among the best in its category, comparable to its aforementioned larger brethren.

Another reason to like it compared to other technology-focused ETFs is its broad diversification within the sector, which gives it a lower standard deviation — a measure of performance volatility — than many of its competitors.

The two other factors are its expenses and its price. The Fidelity MSCI Information Technology Index ETF has the lowest expense ratio in its class, just 0.08%. That means the investor pays just $0.80 per year for every $1,000 invested.

Finally, the ETF is currently priced at about $123 per share, which is among the lowest in its class. If you’re a new investor and don’t have a ton of capital to invest, you may find this price level more accessible while still enjoying strong performance at a low cost.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool owns and recommends Alphabet (A shares), Amazon, Apple, Meta Platforms, Inc., Microsoft, and Nvidia. The Motley Fool recommends Alphabet (C shares) and recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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