ETF Talk: Spread Your Risk with This ETF

“Do not put all your eggs in one basket.”

— Miguel de Cervantes

In the technology sector today, this principle is especially relevant, given the industry’s tendency toward sharp swings in performance.

This sector is fueled by innovation and the emergence of new technologies, which means established companies can quickly become obsolete. Many technology exchange-traded funds (ETFs) focus heavily on only a few of these top mega-cap companies, which means their performance relies on the success of only a few of those tech giants — and if those giants slip, the fallout can be severe.

However, this week’s ETF, the First Trust Technology Alphadex Fund (FXL), takes a different approach. This fund provides an opportunity for investors looking to get exposure to the technology sector while avoiding some of the bigger risks that come with focusing on only a few mega-tech companies. It does so by offering a broader, more equal exposure to a variety of companies in the sector and including a higher allocation to mid-cap companies.

Specifically, FXL tracks a tiered, equal-weighted index of both large- and mid-cap U.S. technology firms. Rather than mirroring the market, the fund uses a smart-beta approach, selecting and weighting holdings based on growth and value metrics to tilt toward tech companies with favorable fundamentals. By doing so, it offers broader diversification and potentially lowers risk for investors, while reducing overexposure to the largest players.

FXL’s top 10 holdings account for only 17.97% of its total holdings, emphasizing its dedication to spreading its eggs in different baskets within the technology sector. Its top holdings include Reddit, Inc. (NYSE: RDDT), 1.93%; Amkor Technology, Inc. (NASDAQ: AMKR), 1.89%; Palantir Companies Inc. (NASDAQ: PLTR), 1.87%; Amphenol Corporation (NYSE: APH), 1.83%; Broadcom Inc. (NASDAQ: AVGO), 1.81%; AppLovin Corporation (NASDAQ: APP), 1.78%; Cloudflare, Inc. (NYSE: NET), 1.76%; Snowflake Inc. (NYSE: SNOW), 1.74%; Vertiv Holdings Co (NYSE: VRT), 1.69% and Rubrik, Inc. (NYSE: RBRK), 1.67%.

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FXL has net assets of $1.36 billion and an expense ratio of 0.60%. It is up 0.07% in the last month, up 9.15% in the last three months and up 8.02% year to date.

Chart courtesy of www.stockcharts.com.

As demonstrated in the chart above, FXL had a steep drop in April but recovered quickly and maintained a relatively stable upward trend in the following months. This may indicate the fund’s ability to remain steady even amid market swings.

Ultimately, FXL could appeal to those who want to invest in technology while cushioning against the risks of overconcentration. The fund offers this protection while still allowing plenty of exposure to innovative companies.

But while FXL could be a less-volatile option for investing in the technology sector, no investment is without risks. Make sure to think about your personal investing goals, timeline and risk tolerance before deciding if this fund is a good fit for your strategy. Investors should always do their due diligence before adding any stock, fund or ETF to their portfolios.

As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You just may see your question answered in a future ETF Talk.

Jim Woods

Jim Woods is a 20-plus-year veteran of the markets with varied experience as a broker, hedge fund trader, financial writer, author and newsletter editor. Jim is the editor of Forecasts & Strategies, Tactical Trader, TNT Trader, Five Star Trader, Bullseye Stock Trader, and The Deep Woods. His books include co-authoring, “Billion Dollar Green: Profit from the Eco Revolution,” and “The Wealth Shield: How to Invest and Protect Your Money from Another Stock Market Crash, Financial Crisis or Global Economic Collapse.” He’s also ghostwritten many books and articles, as well as edited content for some of the investment industry’s biggest luminaries. His articles have appeared on many leading financial websites, including StockInvestor.com, InvestorPlace.com, Main Street Investor, MarketWatch, Street Authority, Human Events and many others. Jim formerly worked with Investor’s Business Daily founder William J. O’Neil, helping to author training courses in the CANSLIM stock-picking methodology. The independent firm TipRanks rates Jim the No. 3 financial blogger in the world (out of more than 6,000). TipRanks calculates that, since 2012, he's made 361 successful recommendations out of 499 total, earning a success rate of 72% and a +15.3% average return per recommendation. He is known in professional and personal circles as “The Renaissance Man,” because his expertise includes such varied fields as composing and performing music; Western horsemanship, combat marksmanship, martial arts, auto racing and bodybuilding. Jim holds a BA in philosophy from the University of California, Los Angeles, and is a former U.S. Army paratrooper. A self-described “radical for capitalism,” he celebrates the virtue of making money from his Southern California horse ranch.