Economy 101: Technology Sector — the Innovation Hub of the Economy

I documented what I learned about the constantly changing landscape of the technology sector as a driver of the U.S. economy

Apple Inc. Headquarters in Cupertino, CA. Credits: Photo by Carles Rabada on Unsplash

The economy is made up of 11 sectors.

These sectors are broad classifications of business activity that can include multiple industries. Each sector of the economy has its function. In recent years, the technology sector has been dominantly invested by a new generation of retail investors, fueled by the success of Robinhood. Beyond Silicon Valley, this sector is essential for efficient operations of other sectors of the economy, and to provide innovations in the way we do business in the 21st century.

In this post, I will go in-depth on what I learn about the technology sector, encompassing the what, the why, and the how-to invest in this crucial industry.

Google, Facebook, and Amazon are just one part of a huge industry — the TECHNOLOGY SECTOR.

What is the tech sector?

In today’s world, it’s hard to imagine getting through the day without our smartphones, computers, and even smartwatches or Alexas that talk back to you. These products are all born out of one of the most innovative sectors in the economy: Technology.

But the tech sector is much more than just a bunch of electronic devices. It’s a vital part of the economy, employing more than 12 million people and producing almost $1.8 trillion worth of products, accounting for 9.3% of the U.S. GDP. Companies in this sector also produce parts such as semiconductors and microchips for new technologies, build electronic devices, develop software, and provide telecommunication and information technology (IT) services. Social media companies, which provide digital platforms for communication and commerce, are also a new and ever-evolving segment.

According to Bloomberg, the tech sector consists of two different sectors — information technology (IT) and communication services. The IT sector includes companies providing networking infrastructure, and software services, producing hardware such as desktops and laptops, routers, and other computer networking equipment. They also manufacture semiconductors and semiconductor parts, not to mention security systems that keep networks safe. Media and entertainment businesses, as well as telecommunication operations, are part of the communication services sector.

The tech sector continues to grow rapidly. As of 2020, there are 585,000 tech businesses in the U.S., up from 525,000 in 2018, according to the Computing Technology Information Association. And new and innovative products and services are expected from tech companies as consumers become increasingly dependent on technology.

About three-quarters of Americans own either a desktop or laptop computer. In 2021, 85% of Americans own a smartphone, and seven-in-ten Americans use social media to connect with one another, engage with news content, share information, and entertain themselves — Pew Research Center.

Companies in the tech sector frequently respond to consumers’ expectations. Cisco makes new internet routers with faster service and better security to power home and business networks. Apple introduced an iPhone with a choice of two or three high-definition cameras. Semiconductor companies like NXP and Toshiba are in search of faster and more resilient materials to make their products.

The tech sector also intersects with every other industry in the economy, including education, healthcare, utilities, manufacturing, and more.

Why invest in the tech sector?

Investors looking for innovation and high growth favors investing in the tech sector. Companies in the tech sector vary in size and influence. You can invest in big technology companies such as Meta (previously known as Facebook), Amazon, Apple, Netflix, and Google, collectively abbreviated as FAANG. Other large companies include Cisco, which manufactures routers; Hewlett-Packard, which makes laptops and cloud data centers; and IBM, which focuses primarily on software manufacturing.

If you’re interested in tech companies that are relatively new to the sector, you can invest in smaller start-ups that are working to disrupt their industries. These companies are building everything from computers, games, and websites, to networks, artificial intelligence, and apps that the larger economy utilize and depend on to run its day-to-day operations.

Volatility Risk in the Tech Sector

The tech sector, with its constant innovation and evolution, is generally thought to be volatile, meaning there’s greater potential for risk, as stock prices can change frequently.

Tech stocks have historically been cyclical because they move up and down based on the state of the economy and consumer demand. To minimize the cyclical nature of technology products and services, many tech companies have used subscription models to increase revenues on enterprise software services, which are necessary even during the economic downturn.

Many tech companies are facing an overvaluation problem, with the average 3-year P/E ratio (share price over earning) for the industry at 29.1 at the time of writing. Because of the high possibility that these stocks are traded far above their actual value, the stocks may be likely to move up and down with greater speed.

For example, Meta’s (Facebook parent company) shares drop 26% in value in one day, following its earning release of Q4 2021. The company (ticker symbol: FB), trading with a P/E ratio of 15, predicted that its revenue will decrease by $10 billion due to a major change in Apple privacy change, effectively impacting Facebook targeted advertising.

U.S. tech companies are also facing increasing competition from countries such as China, South Korea, Taiwan, and others.

Regulations and the tech sector

FAANG stocks including Facebook, Amazon, and Google are dealing with increasing scrutiny from lawmakers in Washington over issues about consumer privacy, and security, as well as fears that they may be monopolizing entire industries. — Stash Team

Technology is also becoming more politicized as concern grows over disinformation via political advertising on social media. Mark Zuckerberg, Facebook’s founder and chief executive officer, testified many times before Congress about the role of Facebook in the 2016 presidential election — specifically, about Facebook’s involvement with the data firm Cambridge Analytica. The scandal revealed Facebook’s failure to safeguard the private information of 50 million Facebook users, which was used for political targeting.

Numerous politicians from both sides of the political spectrum are grappling with the market shares and enormous influence of these giant social media companies. Seeing them as monopolies, some regulators have called for increased oversight, including breaking up some of the biggest tech companies such as Google, Amazon, and Facebook.

How to invest in the technology sector?

Investing in the tech industry: single technology stocks

A single stock is a share of ownership of a company. Here are the tickers of some major tech companies — Alphabet (GOOGL), Apple (AAPL), IBM (IBM), Netflix (NFLX), and Microsoft (MSFT).

In 2021, a record of more than 130 technology companies had initial public offerings (IPOs) raising approximately $60 billion from selling shares to the public. The notable mentions include food delivery app DoorDash, home-sharing site Airbnb, intelligence software company Palantir, etc.

Investors in the U.S. can buy shares of these companies and any other public company in the tech sector individually or through funds — such as exchange-traded funds, or ETFs — that invest in groups of tech companies.

Investing in tech ETFs (exchange-traded funds)

Exchange-traded funds (ETFs) are a basket of investments bundled into a fund that’s traded daily on a public exchange, Nasdaq or NYSE. When you invest in an ETF, you are effectively buying small fractions of the companies within that ETF, which correlate with the weights of stocks held in that fund. That fund owns the stocks within it and generally tracks an index of investments that represent part of an industry or investment theme.

Here are some examples of technology ETFs:

Vanguard Information Technology ETF (VGT)
Invesco QQQ ETF (QQQ)
ARK Innovation ETF (ARKK)
iShares Semiconductor ETF (SOXX)
First Trust Nasdaq Cybersecurity ETF (CIBR)
State Street Technology Select Sector SPDR Fund (XLK)

ETFs have become popular in recent years as they allow investors to invest in the performance of a group of stocks at a fraction of the cost of buying every single stock in the fund. Without handpicking single stocks, investors can save time and research with ETF. Lastly, ETFs can offer diversification, which many consider to be an essential investing strategy.

Remember that all stock market investments are risky, regardless of the cyclical or defensive nature of the stocks. The best way to combat volatility in investing is to dollar cost average, which recommends investing small amounts of money regularly in a diversified portfolio.

Thank you for reading my post, and I hope you found the content insightful as you plan your personal finance journey. If you find its helpful, please follow me and check out my other posts for more investing tips and self-improvement tips. As always, have a fulfilled day as you go out there and be your best self.