In theory just about any investment can be a millionaire maker, but the vast majority won’t get you there. However, technology stocks have a long history of impressive returns. The iShares Expanded Tech Sector ETF (NYSEMKT: IGM) at least has an interesting investment focus that hints at the possibility of it being highly rewarding. But there’s one problem: What does “expanded” mean?
Buying the expanded technology sector sounds like a good thing, but what does that actually mean? It isn’t easy to find that information, which is basically hidden three layers deep. On the exchange-traded fund’s (ETF’s) website, you find that it is meant to provide exposure to the technology sector and, for the expanded part, technology-related businesses in the communication services and consumer discretionary sectors. It takes a little bit of effort, and a review of the prospectus, to figure out that the ETF does this by tracking the S&P North American Expanded Technology Sector Index.
Image source: Getty Images.
As with any index-tracking ETF, the most important thing for an investor to understand is the construction methodology of the index. That is what explains to you what the ETF does, regardless of whether it is expanded or compressed. But you often have to go to the index provider to get more than overly broad descriptions, which is exactly what you’ll need to do with iShares Expanded Tech Sector ETF. Once you find the methodology document you’ll learn that iShares Expanded Tech Sector ETF tracks the information technology sector, the interactive home entertainment sub-industry, and the interactive media and services sub-industry, which are all specific sectors within the GICS classification system. Oh, and Netflix.
So, that’s what expanded means. You get technology stocks and selected stocks from the entertainment and media and services sectors, specifically including Netflix. Fair enough. But is that going to get you to a seven-figure portfolio?
As the chart above shows, the iShares Expanded Tech Sector ETF hasn’t massively outperformed the Technology Select Sector SPDR ETF (NYSEMKT: XLK). Technology Select Sector SPDR ETF is basically a technology ETF without the expanded part. So, all in, you aren’t particularly getting a massive benefit from reaching beyond technology stocks. But you are paying an expense ratio of 0.41%, which is kind of high considering the Technology Select Sector SPDR ETF only charges 0.0945%. That said, both of these ETFs beat an S&P 500 index tracking ETF. However, as Wall Street constantly warns, past performance is not a guarantee of future success.
Technology, broadly speaking, has outperformed lately. But it could just as easily end up lagging behind in the future. And a notable reason for that might be that investors have priced a lot of good news into technology stocks. To put some numbers on that, the iShares Expanded Tech Sector ETF’s average price-to-earnings ratio is 41 times compared to a bit over 24 times for the S&P 500 index. The iShares Expanded Tech Sector ETF’s average price-to-book ratio is 8.7 times verses about 4.9 times for the S&P 500 index.
In other words, the iShares Expanded Tech Sector ETF looks like it is filled with pricey stocks. It is not uncommon for technology stocks to be expensive, but it heightens risk during market pullbacks. Noting that the broader market and technology stocks are both trading near all-time highs right now, it seems like betting on the iShares Expanded Tech Sector ETF being a millionaire maker from this (elevated) point is probably a poor risk/reward balance. When, not if, there is a pullback, the drawdown could be severe as investors often dump the most highly valued investments first.
The iShares Expanded Tech Sector ETF could help you build a million-dollar nest egg. But it doesn’t appear that the expanded piece of the puzzle is all that valuable and the overall technology focus is likely adding a lot of valuation risk right now. There’s nothing wrong with buying this kind of expensive-to-own ETF, but it might be a better choice to broaden out your portfolio to include more than just technology related investments. And the “expansion” offered by iShares Expanded Tech Sector ETF isn’t going to do that for you, you’ll need to consider other investments if you want a truly diversified portfolio.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix. The Motley Fool has a disclosure policy.
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