ETF Exchange Traded Funds
November 21, 2014 - Profiting from New High Growth Technologies
Invest in Booming Technologies with These 3 ETFs by Zacks Investment Research
It often pays to focus on companies that are at the forefront of new or surging industries, as these can really provide investors with great growth opportunities. Take for example the recent social media boom which saw a number of so-called web 2.0 companies go public and soar in the process.
But arguably, the boom days for many of these companies are over, or at least we have reached a bit of a consolidation phase in this sector. Due to this, investors are undoubtedly looking for other high growth areas which could be great investments not only today, but months and years down the line as well.
Below, we have highlighted three such sectors—and corresponding ETFs—that could experience tremendous growth in the years ahead and may make for excellent investments. And due to the ETF approach, you don’t have to worry about a single blowup ruining your investment in these volatile industries, allowing you to play the high growth trend a bit safer than with a single stock technique:
Robotics- Robo-Stox ETF (ROBO)
Although we might have visions of The Terminator when we think of the robotics industry, the space has actually evolved into a much more benign sector, helping consumers with cleaning, businesses with security, and companies with manufacturing. Granted, the military is also a big player in the robotics space, drones and bomb-defusing robots are the bulk here, helping to keep humans out of harm’s way.
But not only have robots been helpful, but they look to be a huge growth industry in the near future too. The Boston Consulting Group looks for the robotics industry to quadruple by 2025, while the Japan Robotics Association looks for the service & personal robotics market to triple as well by 2025 (when compared to 2010 numbers).
To gain exposure to this industry, investors can look to the relatively unknown ROBO ETF. This fund has just about 85 stocks in its basket, tracking the ROBO-STOX Global Robotics and Automation Index. This benchmark looks to give exposure to companies in the global robotics and automation industries, holding securities form over 15 nations.
Industrial automation software and equipment, along with component, software, and subsystem manufacturing, take the two biggest holding spots from a sector look, while healthcare and military aren’t far behind. Investors should also note that the portfolio consists of bellwether stocks (40%) and non-bellwether stocks (60%), while the dividing line between the two is how much they are exposed to the automation industry.
Clean Energy –First Trust Nasdaq Clean Edge Green Energy Index Fund (QCLN)
As more consumers fret over climate change, and if oil prices resume their trend higher once again (or if we want to shift to exporting more of these fossil fuels), the need for clean energy and clean energy technology will only grow. Countries both in the emerging and developed world are starting to understand the importance of this growing industry, and as technologies improve, clean energy will only grow more competitive with more ‘traditional’ fuel sources.
And let’s not forget what a massive market the energy world truly is, and how much potential there is for alternative fuel sources even if they just tap into a tiny corner of the overall power market. In fact, renewable account for just one-eighth of total energy generation in the U.S., so there is definitely a huge market here, even if we just saw that number rise to 20% of overall power.
One way to gain access to this trend is with the relatively unique QCLN. This fund goes beyond investing in just solar or wind companies—as many clean energy ETFs do—and it looks at technology companies that are exposed to the clean energy trends as well.
The ETF holds about 50 stocks in its basket, and actually has its biggest allocation in the technology industry, while consumer segments make up more than 15% too. Top holdings include Linear Technology, Tesla Motors, and SunEdison, all of which make up more than 7.4% of the assets each.
Biotechnology- SPDR S&P Biotech ETF (XBI)
As product pipelines for the old pharma companies continue to dry up it becomes obvious that the future (and increasingly the present) of medicine is in the biotechnology world. The segment already accounts for roughly 21% of the total prescription drug market today ($150 billion), while this is expected to grow to 25% by 2018, representing $224 billion in sales at that time.
But not only is the sector growing along with the rising prescription drug industry, but many of these companies are excellent M&A targets as well. Pharma firms are looking to get more involved in this sector, while other biotechs are looking to shore up their pipelines as well, suggesting that the outlook could be very bright for small and mid caps in this segment.
A great way to play this trend is with the equal weight biotech ETF of XBI. This fund holds just over 80 stocks in its basket and charges a reasonable 35 basis points a year in fees for the exposure. And since it uses an equal weight methodology, large caps do not dominate the portfolio, as roughly 10% is put into this market cap level.
This could make XBI a great choice for those seeking to play the biotech industry M&A wave in a safer way, while also obtaining exposure to some of the mid and large cap names out there like GILD and BIIB. The fund has actually gained over 30% already in 2014, and if you are willing to tolerate some volatility, it could be a star performer in the future as well.
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What Is An Exchange Traded Fund?
An exchange-traded fund or ETF is an investment vehicle traded on stock exchanges, much like stocks or bonds. An ETF holds assets such as stocks, bonds, or futures. Institutional investors can redeem large blocks of shares of the ETF (known as "creation units") for a "basket" of the underlying assets or, alternately, exchange the underlying assets for creation units. This creation and redemption of shares enables institutions to engage in arbitrage and causes the value of the ETF to approximate the net asset value of the underlying assets. Most ETFs track an index, such as the Dow Jones Industrial Average or the S&P 500.
An ETF is Like a Mutual Fund and a Closed End Fund
An ETF combines the valuation feature of a mutual fund or unit investment trust, which can be purchased or redeemed at the end of each trading day for its net asset value, with the tradability feature of a closed-end fund, which trades throughout the trading day at prices that may be substantially more or less than its net asset value. Closed-end funds are not considered to be exchange-traded funds, even though they are funds and are traded on an exchange. ETFs have been available in the US since 1993 and in Europe since 1999. ETFs traditionally have been index funds, but in 2008 the U.S. Securities and Exchange Commission began to authorize the creation of actively-managed ETFs.
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