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$5,000 Invested in This ETF Could Send Your Kids to College

By Dave Kovaleski – Dec 30, 2021 at 8:05AM

Key Points

  • Fidelity MSCI Information Technology ETF is one of the top performing tech-sector ETFs with the lowest expense ratio.
  • In 15 years, the cost of an in-state public college will be more than $30,000 per year.
  • An initial investment of $5,000, with $100 per month contributions, could cover the costs for four years.

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This technology-sector ETF has returned more than 30% annually over the past five years.

College is not cheap, as Iʻm experiencing firsthand at the moment. But one thing that has made the payments a lot more manageable is the fact that I started investing a long time ago, specifically for college, when the kids were wee ones. It doesnʻt take a huge initial investment to get started, particularly if you have a long time horizon in front of you until those tuition payments hit.

If those first college tuition bills are 15 years out, a $5,000 investment right now could grow to cover those bills. A good investment vehicle to get there is an exchange-traded fund (ETF), as it is a diversified pool of stocks that typically mirrors an index and trades like a stock. With a long time horizon, a great choice for that initial investment is the Fidelity MSCI Information Technology ETF (FTEC -0.42%).

A person doing paperwork at a desk.

Image source: Getty Images.

Great performance with low fees

The Fidelity MSCI Information Technology ETF is a fund that flies under the radar a bit, at least compared to some of the other more well-known technology-based ETFs on the market. With about $6.9 billion in assets under management, it is not small by any means, but given its performance and low fees, it should be on your radar.

The fund tracks the MSCI US IMI Information Technology 25/50 Index, one of two major ETFs that follow this benchmark along with the Vanguard Information Technology ETF. This benchmark is one of the broadest among those used for technology-sector ETFs, tracking about 346 stocks across the spectrum -- from large-caps to small-caps. It is primarily made up of software companies, information technology firms, and technology hardware and equipment companies.

With a broader spectrum of names, it has greater diversification than most of its competitors. It also has some screens that seek to provide even greater diversification. Keep in mind that it is a sector fund, so it is less diversified than ETFs that track the broader markets.

As of Nov. 30, the five largest holdings were Apple, Microsoft, Nvidia, Visa, and Adobe. The top 10 holdings made up about 58% of the portfolio. Notable in their absence are tech titans Amazon, Meta Platforms, and Alphabet, which don't fall under the classification of this index as they are considered retailers (in the case of Amazon) or communication services companies.

Further, 86% of the portfolio is in large-caps, 10% is in mid-caps, 43% is in small-caps, and 1% is in micro-caps.

The fund has a terrific track record since it launched on Oct. 21, 2013, with a one-year return of 34.5%, a three-year annualized return of 36.2%, and a five-year annualized return of 30.7% as of Nov. 30. Among technology sector ETFs, only the Vanguard Information Technology ETF, which tracks the same index, and the iShares US Technology ETF have better five-year annualized returns.

But the Fidelity MSCI Information Technology ETF has the lowest expense ratio in its class at just 0.08%.

How this ETF can help you save for college

According to the College Board, the average cost for tuition and room and board at a public college for in-state residents is about $22,690. To attend an out-of-state public college, the cost is about $39,510, and for a private institution, the average cost is roughly $51,690 per year. These prices are up about 2% from the previous year.

Letʻs say your child attends your home state university. In 15 years from now, if costs increase 2% annually, the annual cost will be $30,538, and the four-year cost will be $125,865. That 2% increase may be low, as the rate of increase has been closer to 5% over the past decade. But letʻs stick with 2% as there is a growing sentiment, at least regarding public colleges, that college education costs are too high and need to be more affordable.

So, if you invested $5,000 today in the Fidelity MSCI Information Technology ETF, how might that investment grow in 15 years with regular monthly contributions? This fund doesn't have a track record that long, but the index it tracks has a 15.1% return since inception in 2002.

If you invested $100 per month on top of that initial $5,000 investment, with a 15.1% annual return, you would have roughly $115,000 saved by the time your child first steps on that campus. Of course, you would continue to invest for the next three years -- for the sophomore through senior years -- so by the time your child is a senior, youʻd have about $185,000 saved. That is enough to pay for four years of college and then some for the next kid.

Of course, the past 15 years has been a strong period for stocks overall, so you shouldn't assume that you'll be able to match that 15.1% going forward. Moreover, you might have less than 15 years before your child finishes high school. Either way, you may have to contribute more per month to get there. The key is to start as early as possible.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, 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. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, 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), Alphabet (C shares), Amazon, Apple, Meta Platforms, Inc., Microsoft, and Visa. The Motley Fool recommends Adobe Inc. and recommends the following options: long January 2022 $1,920 calls on Amazon, long March 2023 $120 calls on Apple, short January 2022 $1,940 calls on Amazon, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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