What is the tech sector?
In today’s world, it’s hard to imagine getting through the day without smartphones, computers, and even smartwatches or speakers that talk back to you. These products are all part of one of the most innovative sectors in the economy: Technology.
But the tech sector is much more than just a bunch of gadgets. It’s a vital part of the economy, employing approximately 12 million people and producing $1.8 trillion worth of products, accounting for more than 10% of U.S. GDP. Companies in this sector also produce parts such as semiconductors and microchips for new technologies, build electronic devices, develop software, and provide telecommunication and information technology (IT) services. Social media companies, which provide digital platforms for communication and commerce, are also a new and ever-evolving segment.
The tech sector continues to grow. In fact, 40,000 new tech companies launched in the U.S. in 2018, bringing the national total of tech companies to 525,000, according to the Computing Technology Information Association. And new and innovative products and services are expected from tech companies as consumers become increasingly dependent on technology.
As of February 2019, 74% of Americans owned either a desktop or laptop computer. Similarly, 81% of Americans owned a smartphone, which was up from 35% in 2011, according to Pew Research Center. Meanwhile, 72% of Americans use some sort of social media outlet, compared to only 5% in 2005.
Companies in the tech sector frequently respond to consumers’ expectations. Cisco makes new internet routers with faster service and better security to power home and business networks. Apple introduced an iPhone with a choice of two or three cameras. Instagram is toying with the idea of removing likes and has innovated with its new dark mode. And as semiconductors find their way into more products, processes, and services, companies like NXP and Toshiba search for faster and more resilient materials to make their products.
Why invest in the tech sector?
Investors looking for innovation and growth may want to consider investing in the tech sector, which has a wide range of companies.
Companies in the tech sector vary in size and influence. You can invest in big technology companies such as Facebook, Amazon, Apple, Netflix, and Google, known by the acronym FAANG. Or if you’re interested in tech companies that are relatively new to the sector, you can invest in smaller start-ups that are working to disrupt their industries.
You can have your pick of companies that are building everything from computers, games, and websites, to networks, artificial intelligence, and apps that increasingly run the economy.
Volatility in the tech sector
The tech sector, with its constant innovation and evolution, is generally thought to be volatile, meaning there’s greater potential for risk, as stock prices can change frequently.
One reason is that tech stocks have historically been cyclical, meaning they move up and down based on the economy and consumer demand. But that may be changing, as business models for tech companies change to include subscription models and services, according to experts.
Companies in the tech sector may also face an overvaluation problem, or the possibility that their stocks trade far above their actual value. That can add to volatility, as the stocks may be likely to move up and down with greater speed.
U.S. tech companies are also facing more competition from countries such as China, South Korea, and Taiwan, among others. Competition can add to volatility.
Regulations and the tech sector
FAANG stocks including Facebook, Amazon, and Google are dealing with increasing scrutiny from lawmakers in Washington over issues about consumer privacy, security, as well as fears that they may be monopolizing entire industries.
Conservative politicians have also accused tech companies such as Facebook and Google of having a liberal bias, which they contest.
Technology is also becoming more politicized as concern grows over political advertising on social media. Facebook’s CEO has testified before Congress on more than one occasion on Facebook and its political advertising. Zuckerberg testified after the company’s 2016 Cambridge Analytica scandal, during which the firm Cambridge Analytica accessed and used data on 50 million Facebook users to target them politically.
With the 2020 presidential election on the horizon, numerous candidates have included plans to break up tech companies including Google, Amazon, and Facebook in their platforms.
What companies can I invest in?
In 2019, numerous tech companies had initial public offerings, or IPOs, offering their stock to the public for the first time.These include ridesharing apps Uber and Lyft, social networking site Pinterest, messaging platform Slack, high-end sports gear company Peloton, among others.
Investors in the U.S. can buy shares of these companies and any other public company in the tech sector individually, or through funds—such as exchange-traded funds, or ETFs—that invest in baskets those companies.
Investing in the tech industry: single technology stocks
A single stock is just that, a share of ownership of a company. For example, investors can purchase shares of stock in companies like Alphabet, Apple, IBM, Netflix, and Microsoft.1
Investing in tech ETFs (exchange-traded funds)
Exchange-traded funds (ETFs) are a basket of investments bundled into a fund that’s traded on an exchange like the Nasdaq or NYSE.
When you invest in an ETF, you are effectively buying small fractions of the companies within that ETF. The fraction depends on the weights stocks held in that fund. That fund owns the stocks within it and generally tracks an index–or group of investments that represent part of an industry or investment theme.
Tech ETFs vs tech stocks
ETFs have become popular in recent years as they give investors the opportunity to invest in the performance of a group of stocks without having to buy every single stock in the fund or handpicking single stocks.
Not only can this save time and research, ETFs can offer diversification, which many consider being an essential investing strategy.