How to Invest in Tech Stocks

Smartphones, social networks, search engines, web browsers: The technology sector plays a substantial role in many people’s lives. Likewise, the stocks of tech companies play a major role in many investor’s portfolios.

What makes the tech sector interesting?

The tech sector has rapidly gained in power and importance in recent decades, and has become an intrinsic part of life for most people and companies. Some of the best-known tech companies are also among the world’s most valuable companies. The stocks of tech giants have a reputation for delivering high returns, and in many cases, they do have high growth potential. The sector is exceptionally innovative, and is constantly changing, so that achieving high returns over short periods of time is actually possible.

These five companies, which collectively are often referred to as big tech, are among the largest and most influential firms in the tech sector:

Table 1: Overview of big tech companies

Date: August 30, 2024.

Are there any stock indexes that focus on the tech sector?

The Nasdaq 100 is considered the unofficial tech stock index. It includes numerous US tech companies including Microsoft, Alphabet, and Apple. But it also includes companies in other industry sectors – even if these do not carry much weight in the index. You can find more information in the guide to investing in Nasdaq.

But there is a sub-index of the Nasdaq 100 that is focused entirely on tech stocks. The Nasdaq 100 Technology Sector Index includes all of the 42 tech stocks tracked by the Nasdaq 100 (as per August, 2024).

There are also tech-focused versions of the S&P 500 – one of the most important US stock indexes. Both the S&P 500 Information Technology index and the S&P 500 Capped 35/20 Information Technology Sector Index exclude all companies that are not in the tech sector. The difference is that in the S&P 500 Capped 35/20 Information Technology Sector Index, the heaviest-weighted stock cannot make up more than 35 percent of the index, and other stocks cannot make up more than 20 percent of the index.

Table 2: Overview of tech stock indexes

*Sources: Index publishers, iShares S&P 500 Information Technology Sector UCITS ETF USD (Acc), iShares S&P 500 Information Technology Sector UCITS ETF USD (Acc), and 1nvest S&P500 Info Tech Feeder ETF. Date: August 29, 2024.

There are also tech stock sub-indexes of the global indexes MSCI World and MSCI ACWI, but these indexes too are dominated by US tech giants. The MSCI ACWI ex USA Information Technology Index stands out because it explicitly leaves out US stocks.

If you want to invest solely in European tech stocks, then the Stoxx Europe 600 Technology sub-index is one option. The index includes the 32 tech stocks from the Stoxx Europe 600 index (as per August 2024).

Which ETFs can I use to invest in tech stocks?

You can invest in many of the stock indexes outlined above using exchange-traded funds (ETFs). These investment funds, which are typically passively managed, aim to replicate the performance of an index as closely as possible. By buying shares in an ETF that replicates a stock index, you are investing in all of the stocks that make up that index, without having to buy shares in each stock individually. You can buy and sell ETF shares using a stock broker.

Table 3: Overview of ETFs that replicate tech stock indexes

Daten gemäss Anbietern. Stand: 29.08.2024.

There are several different fees that you should pay attention to when investing in ETFs. In addition to the fees charged by the fund itself, called the total expense ratio (TER), your bank or other stock broker may also charge fees like brokerage fees and custody fees. You can find detailed information in the guide to investment costs. The checklist for choosing an ETF explains what you should pay attention to when choosing a fund to invest in.

Are there any Swiss tech stocks?

The tech sector is largely driven by US-based companies, but it does include some Swiss representatives. Three Swiss stocks are included in the Stoxx Europe 600 Technology index (see Table 4).

Table 4: Swiss tech stocks included in the Stoxx Europe 600 Technology index

*Source: Index publisher. Index weighting as published by iShares STOXX Europe 600 Technology UCITS ETF. Date: August 29, 2024.

What are the risks?

Investing in securities always comes with some risk. High losses are always possible. Additionally, there are several more specific risks that apply to tech stock investments:

• Volatile and fast-moving sector: Investments with high potential profits often also have high potential for loss. That is particularly true for a fast-paced sector like the tech sector that is also heavily influenced by trends. While you may be willing to accept the higher risk in exchange for the higher potential returns, you have to be ready for the opposite scenario of rapid, unexpected losses. The stocks of tech companies are also notoriously volatile. If you have a hard time dealing with fluctuations in the value of stocks, then tech companies may not be a good fit.  
• Overvaluation: The prices of many tech stocks are often higher than the company’s actual fundamental value would indicate. That is because investors believe that these firms to grow substantially in the future. But that creates a risk of stocks being overvalued – and the subsequent risk that the price of the stock will fall if the company fails to meet investor expectations.
• Low dividends: Many tech companies are more focused on growth than on stability. While that may seem appealing, there are also disadvantages, especially if you expect to earn high dividends from your stock investments. Typically, tech stocks do not qualify as dividend stocks. The dividends of many tech sector companies are very low in relation to their stock prices.
• US overweighting: The fact that most of the biggest tech companies are based in the US is not a problem in itself. But depending on how much of your money you invest in tech stocks, you could end heavily exposed to just one geographic region.
• Currency exchange risk: Most tech companies are located in foreign countries – particularly the US. Only a few major tech companies are headquartered in Switzerland. The returns of foreign stocks are not only affected by the stock’s performance, but also by currency exchange rates. If a stock is quoted in US dollars, then a devaluation of the US dollar against the Swiss franc will negatively impact your returns as a Swiss investor.  

How well do tech stocks perform?

First, it is important to understand that there is no way to know how profitable an investment in tech stocks will be in advance. It is never possible to accurately predict the future performance of stocks and ETFs, even if you carefully look at past returns.

But a performance comparison of the global index MSCI World and its sub-index the MSCI World Information Technology index paints a clear picture: Over the past 10 years, tech stocks have been a good investment. With the exception of 2022, the tech index consistently outperformed its parent index.

Table 5: Performance comparison of the MSCI World and the MSCI World Information Technology (performance in US dollars)

Source: MSCI. Performance in US dollars.
*Annualized performance. Date: July 31, 2024.

Note: This article is provided as is for informational purposes only. moneyland.ch does not accept any liability in connection with this article.

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