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Investing in information technology stocks

It’s a potentially lucrative market segment, but the competition is fierce.

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The information technology sector spans a myriad of industries, from software startups to billion-dollar hardware providers. Before you invest, know what you’re investing in and familiarize yourself with the company’s key competitors.

What are information technology stocks?

Information technology (IT) stocks belong to the IT sector, defined by The Global Industry Classification Standards 11 stock market sectors — each named for a distinct slice of the market.

The information technology sector is characterized by companies responsible for the research and development of electronic goods and services. It houses some of the most recognizable names on the market, including Apple, Amazon, Google and Microsoft.

What subcategories does it include?

The technology sector is broken down into three major industry groups:

  • Software. Companies that fall within the software industry include service providers connected to IT, data processing, search engines, systems software, home entertainment software and the Internet. Big names in this industry include Google, eBay, Amazon, PayPal and Microsoft.
  • Hardware. Providers in the hardware industry include companies that manufacture communications equipment, PCs, cell phones, electronic equipment, transformers and point-of-sale hardware. Some of the biggest players in this industry are Apple, HP, SanDisk and Motorola.
  • Semiconductors. A semiconductor is a piece of material — typically silicon — that conducts electricity across electronic circuits. Companies that manufacture semiconductors fall within this industry, including Intel, Microchip Technology and Texas Instruments.

How to invest in the information technology sector

There are two ways to invest in a stock sector: individual stocks and sector-tracking ETFs.

If you’d prefer to invest in individual companies and not the sector as a whole, stocks are your best bet. They tend to be more volatile than ETFs but can offer high-yield returns.

If you’re interested in following the entire sector, consider an ETF. ETFs are more stable than stocks and offer more exposure, but come with expense ratios that typically range from 0.03% to 2.5%.

To purchase stocks or ETFs, you’ll need a brokerage account. Here’s what to expect of the investment process:

  1. Compare platforms. With so many online brokerages to choose from, explore your platform options to find the broker best suited to your needs.
  2. Open an account. Applications for web-based brokerages can be completed online.
  3. Fund your account. Before you can begin trading, fund your account with a transfer from an external account.
  4. Pick your securities. Use a screening tool to filter your options by sector.
  5. Place an order. Once you’ve found a security you’d like to purchase, submit your order.
  6. Track your investments. Log into your brokerage account to track the progress of your investments.

What stocks are in the information technology sector?

The list below shows some of the information technology stocks Canadian investors can buy into on either Canadian or US exchanges. If you’re interested in a specific company, take some time to carefully research it — including its history and financials — before you buy in.

  • The Descartes Systems Group Inc (TSX: DSG)
  • Open Text Corporation (TSX: OTEX)
  • Constellation Software Inc. (TSX: CSU)
  • Kinaxis Inc. (TSX: KXS)
  • Shopify Inc. (TSX: SHOP)
  • Absolute Software Corporation (TSX: ABST)
  • Real Matters Inc. (TSX: REAL)
  • Lightspeed POS Inc. (TSX: LSPD)
  • BlackBerry Limited (TSX: BB)
  • CGI Inc. (TSX: GIB-A)
  • Enghouse Systems Limited (TSX: ENGH)
  • CAE Inc. (TSX: CAE)
  • Dell Technologies Inc. (NYSE: DELL)
  • STMicroelectronics N.V. (NYSE: STM)
  • salesforce.com, inc. (NYSE: CRM)
  • Palo Alto Networks, Inc. (NYSE: PANW)
  • NCR Corporation (NYSE: NCR)

What ETFs track the information technology sector?

You can invest in information technology ETFs from Canada, but if you’re looking for more options, you can also explore ETFs that trade on stock exchanges in other countries like the NYSE in the US. There are several Canadian-based brokerages that offer access to international exchanges on which information technology ETFs trade including Interactive Brokers and Questrade.

Popular ETFs that track the information technology sector include:

  • iShares S&P/TSX Capped Information Technology Index ETF (TSX: XIT)
  • TD Global Technology Leaders Index ETF (TSX: TEC)
  • FT AlphaDEX U.S. Technology Sector Index ETF (TSX: FHQ)
  • BMO S&P 500 Index ETF (CAD) (TSX: ZSP)
  • iShares Core MSCI All Country World ex Canada Index ETF (TSX: XAW)
  • Fidelity MSCI Information Technology Index ETF (NYSEARCA: FTEC)
  • First Trust Technology AlphaDEX Fund (NYSEARCA: FXL)
  • iShares Expanded Tech-Software Sector ETF (BATS: IGV)
  • iShares U.S. Technology ETF (NYSEARCA: IYW)
  • Technology Select Sector SPDR ETF (NYSEARCA: XLK)
  • VanEck Vectors Semiconductor ETF (NYSEARCA: SMH)
  • Vanguard Information Technology ETF (NYSEARCA: VGT)

How is the information technology sector performing?

The graph below tracks how the Technology Select Sector SPDR ETF (XLK) in the US has performed over the last five years. Tracking ETF performance can offer insight into how a stock sector as a whole is performing.

Why invest in the information technology sector?

There’s no way around it — information technology is an exciting space. Investing in the tech sector offers investors the opportunity to buy shares in real-world tech they use everyday. And the sector is so comprehensive that there’s plenty of room to diversify, whether you delve into hardware, software or semiconductors.

If you can afford it, you can opt for one of the tried-and-tested blue chips, like Facebook, Google, Microsoft or Amazon. The problem with these tech monoliths? Not all pay dividends.

Though some companies in the tech sector give back to their investors, some investors get into the tech industry for a different reason: growth potential.

Technology is the largest segment of the market. With a solid grasp of the company you plan to invest in and its competitors, a nimble investor has the opportunity to make money in the tech sector by investing in small companies on an upward trajectory.

What are the FAANG stocks and how do you invest in them?

What unique risks does the information technology sector face?

The excitement that punctuates the technology sector gives way to fierce competition — a competition that fuels company acquisitions. Software tends to do well in a bull market, but during an economic downturn, companies can fold overnight. The opportunity for profit in the tech sector is accompanied by volatility — and this volatility has the potential to tank investments and cripple portfolios.

The tech sector is also vulnerable to government jurisdiction, as evidenced by the European Union’s General Data Protection Regulation. Facebook was pulled in front of Congress, demonstrating that tech giants aren’t immune to regulation. Investors need to keep their finger on the pulse of the news to stay ahead of potentially damaging economic and political events.

How do mergers and acquisitions affect tech stocks?

Mergers and acquisitions can occur in any sector but are especially common in the tech industry. Mergers can trigger volatility within the sector, both for the companies affected and for competitors.

If you own stock in a company that’s acquired by another company, one of three things may happen to your shares:

  • All-cash deal. Your shares disappear from your account and you’re reimbursed with cash.
  • All-stock deal. Your shares disappear from your account in exchange for shares of the purchasing company.
  • Combination deal. Your shares disappear from your account and you receive a combination of cash and stock of the purchasing company.

When acquisitions occur, the companies announce the deal and shareholders can vote to approve the deal. Acquiring companies are typically willing to pay more than the asset’s current market price to encourage shareholders to approve the deal. Once approved, regulators clear the deal.

What does this look like in real life? Back in 2016, US telecommunications giant, AT&T, acquired Time Warner. Time Warner shareholders were offered a combination deal valued at $107.50 per share. In exchange for their Time Warner stock, shareholders were given $53.75 cash and $53.75 in AT&T stock.

If you receive stock of the purchasing company during an acquisition, you’re not required to keep it. Shareholders can sell their shares at any time.

How to buy and sell stocks online

Compare stock trading platforms

These accounts let you invest in stocks and ETFs that track the technology sector.

Name Product Available Asset Types Stock Fee Option Fee Account Fee ETF Transaction Cost Feature Table description
OFFER
Wealthsimple Trade
Stocks, ETFs
$0
N/A
$0
Free
Get a $50 bonus when you open a Wealthsimple Trade account and deposit and trade at least $150.
Pay no commissions when you trade Canadian stocks and ETFs with Wealthsimple Trade.
BMO InvestorLine
Stocks, Bonds, Options, Mutual Funds, ETFs, GICs
$9.95
$9.95 + $1.25 per options contract
$0 if conditions met, otherwise $25/quarter
$0 - $9.95
Buy and sell a select group of Canada’s most popular ETFs without paying commissions.
An easy-to-use online trading platform with access to research, tools, and the option to access InvestorLine adviceDirect for additional professional support.
Scotia iTRADE
Bonds, Options, Mutual Funds, ETFs, GICs, International Equities
$4.99-$9.99
$9.99 + $1.25 contract ($4.99 + $1.25 contract if completed 150 trades or more a quarter)
$0
$9.99 ($4.99 if completed 150 trades or more a quarter)
Pay no annual account fees.
Buy, sell and trade ETFs, Equities, Options and more with competitive commissions.
CIBC Investor's Edge
Stocks, Bonds, Options, Mutual Funds, ETFs
$4.95 - $6.95
$4.95 - $6.95 (+$1.25 per contract)
$0 if conditions met, otherwise $100/year
$6.95
$4.95 - $6.95 is applicable for online stock, ETF and option trades only. Pay $4.95 when you qualify as an Active Trader (trade 150+ times per quarter).
An intuitive and easy-to-use platform with access to a variety of tools that help you make smart decisions and trade with confidence.
Interactive Brokers
Stocks, Bonds, Options, ETFs, Currencies, Futures
Min. $1.00, Max. 0.5% of trade value
$1.50 min. per order
$0
Min. $1.00, Max. 0.5% of trade value
Extensive trading capabilities and global investment tracking.
Access market data 24 hours a day, six days a week and invest in global stocks, options, futures, currencies, bonds and funds from one single account.
Questrade
Stocks, Bonds, Options, Mutual Funds, ETFs, GICs, International Equities, Precious Metals
$4.95-$9.95
$9.95 + $1 per contract
$0
Free
Get $50 in free trades when you fund your account with a minimum of $1,000.
Opt for self-directed investing and save on fees or get a pre-built portfolio and take some of the guesswork out.
OFFER
Qtrade Direct Investing
Stocks, Bonds, Options, Mutual Funds, ETFs, GICs
$6.95 - $8.75
$6.95 - $8.75 + $1.25 per contract
$0 if conditions met, otherwise $25/quarter
$0 - $8.75
Get up to 50 free trades. Be one of the first 100 new Qtrade clients to use the promo code 50FREETRADES and deposit a minimum of $10,000 (or top up to $15,000 to get $150 transfer fees waived). Valid until September 30, 2021.
Qtrade Direct Investing offers low trading commissions and an easy-to-use platform with access to powerful tools and a wide selection of investment options. Trade 100 ETFs free of charge and thousands more for $8.75 or lower.
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Compare up to 4 providers

Bottom line

The information technology sector offers investors the opportunity to back the hardware and software they use everyday. It’s an exciting field but it’s prone to volatility — especially during a down market.

Explore trading platforms for the account best suited to your investment needs.

Frequently asked questions

Image from Getty Images
Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades.

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