Have you ever found yourself holding the wrong technology stock at the wrong time, and ending up taking a big loss as a result? If so, you're not alone. Many of these companies' stories are intoxicating, but their fiscal realities don't always justify the bullish buzz.
There's a good alternative for anyone looking to avoid making this same mistake twice. Exchange-traded funds, or ETFs, offer their owners built-in diversification that makes them much less volatile. Here's a closer look at three of these smart alternatives to erratic tech stocks.
Invesco S&P 500 High Dividend Low Volatility ETF
The name says it all. Built to mirror the S&P 500 Low Volatility High Dividend Index, the Invesco S&P 500 High Dividend Low Volatility ETF (SPHD -0.64%) holds fifty S&P 500 stocks with a history of high dividend yields and -- you got it -- low volatility.
But it's not an arbitrary collection of tickers. Every few months, Standard & Poor's identifies the S&P 500's 75 highest-yielding names first, and from that pool selects the 50 tickers with the least volatility for the prior 12 months. Unsurprisingly, these stocks tend to be in businesses that are relatively predictable... predictable enough to support above-average dividend payments.
The ETF's current dividend yield stands at 4.75%, and its average daily net movement compared to the market -- a measure called beta -- is only about 90% of the S&P 500's net movement on any given day.
That's a seemingly small difference, but that small difference makes the fund much easier to own through turbulent times. This is of course when you should be most committed to your long-term plan.
Do know that this fund historically underperforms the broad market; that's the trade-off for sleeping well at night. For many investors, though, the trade-off is worth it.
Vanguard Information Technology ETF
While you may have been burned by tech stocks in the past, that doesn't necessarily mean you should give up on them entirely. You may just need to change your tack. Rather than trying to perfectly time your trades of individual technology stocks, simply step into the entire sector and stick with it for the long haul.
Enter the Vanguard Information Technology ETF (VGT 0.04%).
Vanguard's flagship technology index fund reflects the performance of the MSCI U.S. Information Technology Index, consisting of around 370 different tech names. Apple, Microsoft, and Nvidia rank as its biggest holdings. This exchange-traded fund isn't meant to offer speculation on some of the market's most popular technology stocks, though -- quite the opposite, actually. This fund provides long-term exposure to the tech sector in its entirety.
And that's no small matter.
See, when you own individual technology stocks, it's tempting to shop around for the best exit prices, or hold out for better entry prices. It's this line of thinking, however, that often causes investors to end up burning themselves. That's because timing the market is tough to do, and it's even tougher with ever-volatile tech stocks.
When you enter a trade planning on holding onto it even if things turn temporarily sour, you're more likely to actually stick with it when it's performing poorly because you want to be holding onto this basket of stocks when they recover. To this end, know that the Vanguard Information Technology ETF has outperformed the overall market for nearly any meaningful timeframe.
iShares Core Aggressive Allocation ETF
Finally, if a tech-based ETF is still a little too much like the picks that ended up denting your portfolio, there's another fund that fits the bill without crimping your potential for capital appreciation. That's the iShares Core Aggressive Allocation ETF (AOA -0.35%).
The iShares Core Aggressive Allocation ETF is a so-called "fund of funds," meaning its underlying holdings are other exchange-traded funds. Those funds hold equities, of course, so the iShares Core Aggressive Allocation ETF is ultimately exposure to the stock market. It's just a round-about way of getting it.
The value-add comes in the allocation. The iShares company has figured out the optimal mix of stocks broken down by market cap, style, and even region to maximize returns and minimize risk. The thing is, the approach isn't a mere marketing gimmick. It works!
Data from Morningstar says this exchange-traded fund is outperforming the average fund from this category as well as its benchmark index for the past three, five, and 10-year stretches. That's one of the reasons Morningstar's given the ETF a five-star rating.
Even more amazing is how such a strong performance is paired with relatively modest volatility.
Whereas market-beating results typically require taking above-average risks and stomaching above-average volatility, this ETF's long-term beta score is a mere 78%. In other words, while it may only participate in about three-fourths of the broad market's gains, it also only mirrors about three-fourths of the market's daily losses.
Given its market-beating performance though, somehow the iShares Core Aggressive Allocation ETF seems to be plugged into more of the stock market's gains and sidesteps much of the broad market's weakness.
