What To Consider In Buying A Tech ETF

While a company may tolerate having an unprofitable or low-profit ETF for a while in anticipation of future growth, if it appears it is at a standstill they may very well close the ETF, as happens nowadays extremely often.

To understand this, consider an ETF with $100 million. Expense ratios range widely but often are around 0.25%, 0.50%, or 0.75% for many tech ETFs. At that fund size that means a yearly revenue for the ETF sponsor of $250,000, $500,000, or $750,000. That money then goes to support the ETF's managing staff and analysts, as well as the compliance, data processing, filing, marketing and other costs for keeping the ETF going.

At $100 million the ETF may be just enough to pay down all those costs and give the firm a little bit of profit, but when it hits the $50 million or below level the numbers become untenable - at say $125,000, $250,000, or $375,000 in annual average revenue.

As you explore technology ETFs therefore, it is important to balance the attractiveness of some sub-sector ETFs with the knowledge that they have a unique risk of shutdown to them, which means you may be forced to exit the investment at an inopportune time and perhaps left with no exact or even similar alternatives to that very specific ETF. This can be exceptionally disruptive to an investment strategy, as timing in entry and exit is everything.

Risk 2 For Tech ETFs: Differing Holdings Composition And Indexes

Because of how broad many technology categories are and not firm or standardized in exactly what they include or not include, in the tech investment world, a lot of ETFs may sound very similar but differ immensely in the index of particular investments they track.

That means that two ETFs that sound roughly the same in terms of either being a broad category or specific focus can own significantly different stocks and perhaps at very different weightings.

This makes looking at the index than a tech ETF tracks of special importance, as well as the rules that govern the index and how it may change, as this allows you to really understand the investment basket you are acquiring.

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Disclaimer: These are only my opinions and do not constitute investment advice.

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