In theory, almost any investment has the potential to make you a millionaire, but most investments don't get you there. But technology stocks have a long history of delivering impressive returns. of iShares Extended Tech Sector ETF (IGM -1.05%) At the very least, it has an interesting investment focus that suggests very profitable potential. But there's one problem. What does “extension” mean?
What does the iShares Expanded Technology Sector ETF do?
Acquiring an expanded technology division sounds good, but what does it actually mean? That information is basically hidden three layers deep, so it's hard to find. It's not easy. A look at the exchange-traded fund (ETF) website reveals that the fund aims to provide exposure to the technology sector and, by extension, technology-related businesses in the communications services and consumer discretionary sectors. You can see that it is intended to provide exposure. It takes a little effort and a look at the prospectus to understand that the ETF does this by tracking it. S&P North America Expanded Technology Sector Index.
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As with other index-tracking ETFs, the most important thing for investors to understand is how the index is constructed. This is what ETFs do, whether they are expanded or compressed. However, it is often necessary to visit an index provider for more information than an overly broad description. This is exactly what you need to do with the iShares Expanded Tech Sector ETF. If you find this methodology document, you will see that the iShares Expanded Tech Sector ETF tracks the Information Technology sector, the Interactive Home Entertainment sub-industry, and the Interactive Media and Services sub-industry. These are all specific sectors within the GICS classification system. . Oh, and Netflix.
That's what expansion means. You get access to technology stocks and select stocks in the entertainment, media, and services sector, especially Netflix. fair enough. But will that bring your portfolio to seven figures?
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iShares Expanded High-Tech Sector ETF: Not a very good track record, just overvalued stocks
As the chart above shows, the iShares Expanded Tech Sector ETF hasn't significantly outperformed other ETFs. Technology Select Sector SPDR ETF (XLK -1.35%). The Technology Select Sector SPDR ETF is basically a technology ETF without the expansion portion. In other words, there's not particularly much to be gained by branching out into areas other than technology stocks. However, the expense ratio it pays is 0.41%, which is a bit high considering the Technology Select Sector SPDR ETF only charges 0.0945% in fees. That said, both of these ETFs S&P500 Index-linked ETF. But as Wall Street always warns, past performance is no guarantee of future success.
Broadly speaking, technology has outpaced performance these days. But you can easily fall behind in the future. And the reason it's so notable may be that investors are pricing in a lot of good news for technology stocks. To name a few numbers, the iShares Expanded Tech Sector ETF's average price-to-earnings ratio is 41 times, compared to just over 24 times the S&P 500 index. The iShares Expanded Tech Sector ETF's average price-to-book ratio is 8.7x, compared to about 4.9x for the S&P 500 index.
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In other words, the iShares Expanded Tech Sector ETF appears to be filled with overvalued stocks. It's not uncommon for tech stocks to become expensive, but the risk increases during market pullbacks. Pointing out that both broader market stocks and technology stocks are currently trading near all-time highs, the iShares Expanded Technology Sector ETF has become a millionaire since this point. Betting on what will happen probably seems like a poor balance of risk and reward. Drawdowns can be severe, not when there is a pullback, but because investors are often the first to exit their most valuable investments.
Spread your bets
The iShares Expanded Tech Sector ETF could help you build a $1 million nest egg. However, we don't believe the expanded pieces of the puzzle are worth much, and the overall focus on technology may add a lot of valuation risk at this point. There's nothing wrong with buying this kind of ETF with a high cost of ownership, but expanding your portfolio beyond technology-related investments may be a better choice. And the “expansion” offered by the iShares Expanded High-Tech Sector ETF is not for you. If you want a truly diversified portfolio, you should consider other investments.
