Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you expect technology-heavy companies to thrive as our world becomes more electronic over time, the First Trust NASDAQ-100-Tech Index ETF (Nasdaq: QTEC) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.
The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The First Trust ETF's expense ratio -- its annual fee -- is 0.60%, which is a bit higher than that of many ETFs, but also considerably lower than that of most stock mutual funds. The ETF is relatively small, too, so if you're thinking of buying, beware of occasionally large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.
This ETF has performed rather well, but it's also very young, with just a few years on the books. It outperformed the S&P 500, on average, over the past three and five years. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.
With a low turnover rate of 26%, this fund isn't frantically and frequently rejiggering its holdings, as many funds do.
What's in it?
Plenty of tech-heavy companies had strong performances over the past year. Nuance Communications (Nasdaq: NUAN), for example, advanced 33%, with three of its four divisions reporting strong growth and profit margins, and its enterprise division posting only modest growth. Nuance is known for its speech-recognition technology, which is used in Apple products, among other places. (Siri, anyone?) Up 12% was Chinese search engine specialist Baidu (Nasdaq: BIDU), which recently posted fourth-quarter revenue up 83% and saw net profit margins soar to 45%. Some worry about slowing growth in China, while others are excited about Baidu's growth in mobile communications and its plans to grow internationally.
Other companies didn't do as well last year, but they could see their fortunes change in the coming years. Micron Technology (NYSE: MU) shed 31%, partly on the sudden death of its CEO early this year and also on shrinking revenue and an oversupply of DRAM chips. The company's growth in serving the needs of tablets and smartphones bodes well for it, though. Meanwhile, Akamai Technologies (Nasdaq: AKAM), down 6%, has recently topped many investors' expectations, but still leaves some worried about shrinking margins and slowing growth.
The big picture
Demand for technology isn't going away anytime soon. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.
Learn about the 5 ETFs That Could Soar in 2012. And if you're looking for some great investments beyond ETFs, consider these 12 Dividend Stocks for 2012.
