ETFs with Holdings in Canada’s Biggest Tech Companies
Which ETFs cover Canada’s biggest tech companies? Let’s look at the tech industry in Canada and more.
The tech space has always been an area of intrigue for many investors. Who doesn’t want to invest in innovative and society-changing technologies? Some of the most valuable companies in the world, which have generated ludicrous returns for early investors, are tech companies such as the infamous FAANG (Facebook, Apple, Amazon, Netflix, and Google) stocks.
However, the blue-chip tech stocks that we all know and love are mostly based in the US. In general, US technology companies have outpaced Canadian companies due to a more significant attraction of talent, more aligned economic incentives, and more favourable tax treatment of corporations. Canada’s technology sector is not as well known; however, there are some up-and-coming players in the space.
Canadian Tech Industry Overview
Technology is not an especially large sector within the overall Canadian market. As of April 29th, 2022, the Information Technology sector only made up 5.7% of the overall S&P/TSX index. Information technology is a broad sector that includes specific sub-sectors such as:
- Software
- Hardware
- IT Services
- Semiconductors
There are not a vast number of players within the Canadian tech space. The three main players are:
Shopify: The largest constituent of the technology space in Canada. Shopify is an e-commerce company that facilitates e-commerce transactions with its proprietary platform and retail point-of-sale systems. Their unique platform allows retailers to open an e-commerce channel with a suite of services.
Constellation Software: Constellation is the second-largest constituent of the technology space in Canada. Constellation has one of the strongest and most consistent track records of shareholder returns among all companies in Canada. Constellation is largely an acquisition business that is centred around acquiring software businesses.
CGI Inc.: CGI Inc. is the third-largest constituent of the Canadian technology space. CGI is a global information technology consulting and systems integration company.
Where Can Investors Gain Exposure to Canadian Tech Through ETFs?
The benefits of ETFs are clear: greater liquidity, greater diversification, and lower costs. This makes using ETFs to gain exposure to a particular sector very efficient. For gaining exposure to Canadian tech, some suitable ETFs are:
iShares S&P/TSX Capped Information Technology Index ETF (XIT)
For the Canadian tech space, this starts with the iShares S&P/TSX Capped Information Technology Index ETF (XIT). This ETF is constructed to track the S&P/TSX Capped Information Technology Index through physical exposure (actually owning the shares of the index).
Invesco NASDAQ 100 Index ETF (QQC)
Canadian investors who wish to gain exposure to US technology stocks can do so by investing in Invesco NASDAQ 100 Index ETF (QQC). This CAD-denominated ETF is constructed to track the NASDAQ-100 Total Return Index. This ETF only has two holdings, Invesco QQQ and Invesco NASDAQ 100 ETF, both of which are ETFs which track the NASDAQ 100 index.
TD Global Technology Leaders Index ETF (TEC)
Canadian investors who wish to gain exposure to global technology companies can do so by investing in TD Global Technology Leaders Index ETF (TEC). This CAD-denominated ETF is constructed to track the Solactive Global Technology Leaders NTR Index. While this is a global technology ETF, most exposure is still derived from the US.
Performance and Outlook of Canadian Tech ETFs
2022 has been an abysmal year for technology stocks thus far. Fears of high inflation and rising interest rates have severely impacted the valuation of high-growth stocks such as large tech companies.
- iShares S&P/TSX Capped Information Technology Index ETF (XIT), -17.9% in the last 3 months, -38.3% year-to-date.
- Invesco NASDAQ 100 Index ETF (QQC), -11.8% in the last 3 months, -26.4% year-to-date.
- TD Global Technology Leaders Index ETF (TEC), -13.9% in the last 3 months, -29.0% year-to-date.
We can observe that the Canadian tech space has seen the worst performance recently. This is largely due to the heavy exposure to Shopify within the S&P/TSX Information Technology Index.
Going forward, the macroeconomic environment may continue to weigh on the valuation of technology companies. However, investors should continue to seek exposure from these companies in the long term as they continue to innovate and generate free cash flow. These recent depressed valuations may represent an attractive entry point as expected returns move higher despite the negative market sentiment.
Data for this article is as of May 25th, 2022, unless otherwise noted.
Disclaimer: This article is limited to the dissemination of general information pertaining to investment strategies and financial planning and does not constitute an offer to issue or sell, or a solicitation of an offer to subscribe, buy, or acquire an interest in, any securities, financial instruments or other services, nor does it constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment.
