As veteran investors can attest, trading the stock market’s hottest technology stocks looks easier than it actually is. You hear all about the gains they so often dish out. But you rarely hear the horror stories of their subsequent pullbacks. All too often, newcomers end up stepping in at the worst possible time: when bullishness is rampant, and at the peak of the buying frenzy.
If you’re ready to steer clear of the stress of trading tech stocks and would like to try a completely different tack, here’s a closer look at three exchange-traded funds (ETFs) to consider. They’re easier to own, and in the end, they might just give you even better returns than chasing technology stocks ever did.
1. Technology Select Sector SPDR Fund
To be fair, technology stocks themselves aren’t the problem — they do just fine in the end. The problem is how most people end up handling them. Rather than holding on to them for the long haul and riding out their usual volatility, some investors try to buy at a short-term low or sell at a short-term high.
If you’ve done the same, take some solace in the fact that you’re not alone, and it’s not entirely your fault. Analysts, the media, and amateur investors love to talk about story stocks from the tech sector, painting certain pictures of what you can expect from them. The pictures being painted, though, often omit the reality that these stocks are being traded by a bunch of people willing to take profits at the drop of the hat.
The solution to this problem is avoiding the temptation for short-term trading altogether. The Technology Select Sector SPDR Fund (NYSEMKT: XLK) accomplishes this perfectly. It’s a basket of the market’s top technology stocks, and since you can’t buy and sell its individual holdings, you own the fund with the mindset that it’s going to be a long-term holding. You’re sitting on a theme-based investment rather than a position that was never meant to be more than a short-term speculation.
Holding the Technology Select Sector SPDR Fund won’t completely shield you from technology’s inherent volatility, although it will curb it. Either way, it’s worth the wait. This ETF has outperformed the SPDR S&P 500 ETF Trust (NYSEMKT: SPY) for the better part of the past 20 years.
The moral of the story, as with every other sector, is that you’re better off just buying and holding tech stocks and letting time do all the work.
2. SPDR S&P 500 High Dividend ETF
It’s certainly fun to aim for the big gains that technology stocks occasionally dish out. But it’s hardly a complete plan for a portfolio. Even if you’re a growth-minded investor, there’s nothing wrong with some exposure to stocks at the other end of the spectrum.
Those are value stocks, or more specifically, dividend stocks (which are typically value stocks as well). You don’t even have to pick an individual one. An ETF will do the trick nicely for this purpose, too. And one of the best of these options for anyone burned by tech stocks in the past is the SPDR S&P 500 High Dividend ETF (NYSEMKT: SPYD).
As the name suggests, this fund’s payout is above the market average. Its current dividend yield of 3.7%, in fact, is markedly higher than the S&P 500‘s current yield near 1.5%. That’s because State Street Global Advisors, which manages the fund, limits the fund’s holdings to the S&P 500’s 80 highest-yielding stocks.
For investors, though, that’s not the coolest detail about this fund. What’s so compelling is that like the S&P 500 High Dividend Index it’s meant to mirror, this fund is rebalanced every six months to hold the index’s 80 highest-yielding stocks at the time. This approach means you always enjoy the highest possible yields offered by large-cap companies.
3. iShares Core S&P Mid-Cap ETF
Lastly, add the iShares Core S&P Mid-Cap ETF (NYSEMKT: IJH) to your list of ETF alternatives to risky, volatile technology stocks.
It’s not the go-to name for investors looking to do some indexing. That honor typically belongs to the aforementioned SPDR S&P 500 ETF Trust, or perhaps the SPDR Dow Jones Industrial Average ETF Trust (NYSEMKT: DIA). Those two picks are still perfectly suitable for any investor who wants to build a good foundation for a portfolio, or simply keep things simple.
The iShares Core S&P Mid-Cap ETF has an edge, however, that former tech-loving investors just might appreciate. Many of the 400 companies that make up the S&P 400 Mid Cap Index are in their high-growth phase, having survived their early days when many organizations go belly up. Yet, because they are only midsize, they still have room to grow and market share to win.
More than anything, though, they have gains to dish out. Since its launch in May of 2000, not once has the iShares Core S&P Mid-Cap ETF trailed the S&P 500’s performance. In fact, it’s more than doubled it in that 22-year span.
As is the case with the Technology Select Sector SPDR Fund and the SPDR S&P 500 High Dividend ETF, the trick is just leaving the mid-cap fund alone even when it’s uncomfortable to do so. You’re not speculating on individual stocks here. You’re staking a claim on the concept that companies at this stage are en route to even bigger and better things.
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