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Canadian tech stocks like Shopify (TSX: SHOP) and Constellation Software (TSX:CSU) have both had a remarkable bull run over the past five years, with gains of over 1,982% and 264% respectively. Both companies have excellent business models, broad cash trails and growing market dominance.
The downside is that all this growth has made both stocks very expensive, and not just from a fundamental-based valuation perspective. To buy a single share of each company at their current price, you would need a total of $3,563.12.
Unless you’re buying fractional shares (or have a sizable account), such a sum could deter new investors. Fortunately, there is a solution. By using an exchange-traded fund (ETF) such as iShares S&P/TSX Capped Information Technology Index ETF (TSX:XIT), you can get exposure for less than $50.
The right ETF for the job
As an ETF, XIT holds an underlying “basket” of stocks. When you buy a stock of XIT, you buy an equivalent percentage of ownership in each underlying stock, depending on the proportion held in the ETF. XIT shares are traded on the stock exchange and can be bought and sold like any other stock.
Currently, XIT holds a total of 24 Canadian IT sector stocks. The two largest holdings are SHOP at 27.21% and CSU at 23.90%. Other companies like Open text, Computer graphics, Nuvei, Light trade, Descartes Systems Group, a Blackberry are also held in smaller portions.
XIT has a management expense ratio (MER) of 0.61%, which is more expensive than an index fund but typical of a thematic sector fund. The ETF currently trades at a price of around $46 per share, making it an affordable way to gain exposure to some otherwise expensive Canadian tech stocks.
How did it work?
A word of warning: the backtest results provided below are hypothetical in nature, do not reflect actual investment results, and do not guarantee future results. Hypothetical returns do not reflect trading costs, transaction costs, or actual taxes due on investment returns.
The results are disappointing. Since its inception, XIT has barely surpassed the S&P/TSX 60 Index, with almost all of its outperformance coming in 2013-14 and 2019-20. Additionally, XIT had higher volatility and worse declines than the broad market index. Few investors can endure these episodes of underperformance and turbulence.
The insane takeaway
In my opinion, XIT is best used as a substitute for SHOP and CSU stocks if you don’t have the capital to buy stocks without any of them dominating your portfolio. You also get 22 other tech companies to diversify your holdings a bit. Either way, by buying XIT, you are making a concentrated bet on the continued outperformance of the tech sector.
Investors looking to buy now should be wary of performance chasing and recency bias. XIT is highly concentrated and is likely to underperform the broad market index on a long-term risk-adjusted basis. 2022 could also be a year where high-value growth stocks face strong headwinds from inflation and rising interest rates.