3 ways to invest in technology stocks

An index tracker, an actively managed fund, and individual stock picks are the three ways I invest in technology stocks.

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Technology stocks — those involved in electronics, software, computers, artificial intelligence, and other information technology industries — are exciting. They are typically growth stocks. Tech indexes have typically outperformed the broader market over the long term. I don’t want to miss out on this potential for boosting my portfolio gains, so I have exposure to tech stocks, but in three different ways.

Tracking a tech index

I invest in tech growth stocks by holding units in the Legal & General Global Technology Index Trust in my SIPP. The trust passively tracks the performance of the FTSE World-technology Index. The trust’s historical tracking error is 0.42% gross of fees. Lower is better with tracking error, and this one suggests the trust does a good job of matching the index’s performance.

The table below shows the top five trust holdings as per the latest fund fact sheet. I can’t see any surprises as the big US tech names are there, along with the world’s largest dedicated independent semiconductor foundry.

Top five Legal & General Global Technology Index Trust holdings

Company Percentage of fund holdings
Apple Inc 16.4
Microsoft Corp 13.2
Alphabet 8.8
Facebook 4.2
Taiwan Semiconductor Manufacturing Company 4.1

Source: Legal & General Global Technology Index Trust factsheet

The Legal & General Global Technology Index Trust declares itself a high risk with potentially high rewards offering. The index it tracks is concentrated in one sector, namely technology. Furthermore, the top 10 holdings account for 56% of the total value of the portfolio. Companies domiciled in the US account for 79% of the value of the portfolio. I can accept the risk, and so far, the rewards have been impressive: the trust has returned over 200% since 2016.

Scottish Mortgage Investment Trust

I also get exposure to technology stocks by holding Scottish Mortgage (LSE:SMT) shares in my ISA. In contrast to the passive Legal & General Global Technology Index Trust, Scottish Mortgage is a stock picker. It has built a portfolio of around 90 new-economy stocks that rely on technology or disruptive business models.

Top five Scottish Mortgage Investment Trust holdings

Company Percentage of fund holdings
Tencent 6.5
Illumina 6.1
Amazon.com 5.9
Tesla Inc 5.1
Nio 4.8

Source: Scottish Mortgage Investment Trust factsheet

Scottish Mortgage states that it runs a medium to high-risk portfolio. It is not concentrated solely in the information technology sector. Also, the top 10 holdings of this portfolio make up 49% of its value. This may help to explain why the portfolio is deemed less risky than the Legal & General one. However, of the 90 or so stocks in the portfolio, 50 are private (16.1% assets). Private companies tend to be smaller and earlier in their lifecycle than public ones and more prone to failure. I am willing to accept the risks in exchange for potentially high rewards. Although past performance does not guarantee future performance, the Scottish Mortgage share price has risen nearly 900% over the last 10 years.

Tech stock picking

I also pick individual UK-listed technology stocks to hold for the long term in my portfolio. Stock picking can be rewarding, but it takes time and effort to identify companies with a sustainable competitive advantage, a great management team, solid revenue growth, positive operating cash flows, and a strong balance sheet. I am also aware that I could be completely wrong about my stock picks and lose everything.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James J. McCombie owns shares of Scottish Mortgage Inv Trust. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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