The iShares S&P/TSX Capped Information Technology Index ETF (ticker: XIT) is an exchange-traded fund that can give you exposure to publicly traded technology companies in Canada.
Managed by BlackRock Canada, XIT tracks the S&P/TSX Capped Information Technology Index, a benchmark that includes the largest Canadian tech firms listed on the Toronto Stock Exchange, subject to a cap on individual constituent weightings to prevent overconcentration.
This ETF is structured as a passively managed fund, designed to replicate the performance of the underlying index before fees and expenses.
XIT serves as a geogrpahical and sector-specific equity instrument, and it can for instance be used as a satellite holding in global tech allocations. With its concentrated exposure and relatively small number of holdings, XIT is highly relevant to investors seeking exposure to Canada’s tech sector and who do not need a higher degree of diversification within th ETF.
XIT trades on the Toronto Stock Exchange and is denominated in Canadian dollars. This has helped to make it popular among domestic investors who wish to avoid currency exposure.
Index Methodology
- The S&P/TSX Capped Information Technology Index is reviewed quarterly and rebalanced to ensure compliance with the capping rule.
- This index uses a modified market capitalization weighting methodology, with a maximum 25% cap on any single constituent. The 25% cap was put in place to mitigate the risk of overexposure to dominant firms such as Constellation Software Inc. (CSU) or Shopify Inc. (SHOP), which historically have held significant weight in the Canadian tech landscape.
Fund Composition
- XIT’s portfolio typically holds between 10 to 15 companies, which is significantly fewer than U.S. or global technology ETFs. While this concentration results in higher volatility, it also means performance is more tightly linked to the success or weakness of a handful of firms.
- The fund primarily includes stocks from sub-industries such as application software, IT consulting, fintech, and information services. Hardware and semiconductor exposure is limited, reflecting the structure of the Canadian tech sector itself.
Fund Key Fact
Cusip: 46428N106
Inception date: March 19, 2001
Asset class: Equity
Units outstanding: On May 21, 2025, there were 8.3 million units outstanding.
Price: On May 21, 2025, there price eas 68.07.
P/B Ratio: On May 21, 2025, the ratio was 5.71.
Distribution frequency: Semi-annual
Risk Level: High
Management Fee
In 2025, the management fee was 0.55%, and the Management Expense Ratio (MER) 0.60%.
Holdings
As of May 21, 2025, this ETF only had 20 holdings, and one of those were Canadian dollars. All the 19 equities were from the information technology sector. Together, investments in Shopify and Constellation Software made up close to half of the total weight. As you can see in the list below, only four of the 20 holdings exceeded 10%, and 11 of the 20 holdings were at less than 1% each.
TICKER – COMPANY NAME – WEIGHT IN PERCENT
SHOP – SHOPIFY SUBORDINATE VOTING INC CLA – 25.23
CSU – CONSTELLATION SOFTWARE INC – 24.52
GIB.A – CGI INC CLASS A – 17.26
CLS – CELESTICA INC – 10.49
DSG – DESCARTES SYSTEMS GROUP INC – 7.70
OTEX – OPEN TEXT CORP – 5.86
KXS – KINAXIS INC – 3.16
BB – BLACKBERRY LTD – 1.80
LSPD – LIGHTSPEED COMMERCE INC – 1.17
ENGH – ENGHOUSE SYSTEMS LTD – 0.65
CMG – COMPUTER MODEL LTD – 0.39
BITF – BITFARMS LTD – 0.36
TCS – TECSYS INC – 0.31
DCBO – DOCEBO INC – 0.28
DND – DYE AND DURHAM LTD – 0.26
CVO – COVEO SOLUTIONS SUBORDINATE VOTING – 0.21
SYZ – SYLOGIST LTD – 0.12
STC – SANGOMA TECHNOLOGIES CORP – 0.11
QTRH – QUARTERHILL INC – 0.09
CAD – CAD CASH – 0.030.65
Performance and Volatility Characteristics
As a sector ETF tied to a relatively narrow and domestically focused index, XIT’s performance tends to exhibit elevated volatility and periods of sharp divergence from broader Canadian indices like the S&P/TSX Composite. The fund has shown long-term growth potential during bull markets in technology but can experience deep drawdowns in risk-off environments or when flagship holdings underperform.
Returns are largely driven by growth-oriented business models, which tend to reinvest earnings rather than pay dividends. Consequently, XIT offers minimal income and is generally inappropriate for yield-focused investors. The lack of diversification outside tech and the index’s cap-weighting structure can make performance top-heavy, especially when a few firms account for the majority of returns (despite the 25% cap).
Liquidity and Spreads
XIT trades on the Toronto Stock Exchange. While the ETF’s average daily volume is lower than that of major U.S. sector ETFs, it generally provides sufficient liquidity for retail investors, with tight bid-ask spreads under normal conditions.
Management Expense Ratio
The management expense ratio (MER) is 0.61%, which is higher than broad-market ETFs but typical for narrow, sector-specific Canadian ETFs.
Tax Efficiency for Investors in Canada
As a Canadian-domiciled fund, XIT offers tax advantages for registered accounts, such as RRSPs and TFSAs, and avoids U.S. withholding taxes that may apply to U.S.-listed equivalents.
Use Cases in a Portfolio Context
XIT can play several roles in a portfolio, depending on the investor’s risk profile and strategy.
- For Canadian investors seeking thematic exposure, it offers a way to allocate to the country’s innovation-driven companies without stock-picking.
- For global investors, XIT can act as a complementary tech satellite, especially in portfolios that are overly heavy in U.S. megacaps
Considerations and Limitations
XIT´s sector concentration, geographic limitation, and small number of holdings make it unsuitable as a core equity holding. It’s best positioned as a tactical allocation, either to capitalize on bullish trends in Canadian tech or to increase exposure during periods of strong performance from certain firms included in the index.
Investors should be aware of several limitations before allocating to XIT. The Canadian tech sector is narrowly defined, lacking the diversity of its U.S. counterpart. Exposure to cutting-edge segments like semiconductors, artificial intelligence, or global cloud infrastructure is currently minimal or non-existent. XIT´s reliance on a handful of large firms also introduces company-specific risk, particularly in periods of earnings disappointment or regulatory pressure.
Another consideration is valuation sensitivity. Canadian tech stocks, particularly high-growth names, can trade at elevated multiples during bull markets, which increases downside risk when sentiment shifts. The capped index construction helps moderate single-stock exposure but does not eliminate the systemic correlation among tech firms during sector-wide corrections.
Shopify and Constellation Software – the two dominating investments for XIT (May 2025)
Shopify
Shopify Inc. is a Canadian multinational e-commerce company headquartered in Ottowa, Ontario. It is chiefly known for its proprietary e-commerce platform, also named Shopify, which offers retailers a suit of services, including online store, payment solutions, shipping solutions, and marketing.
Today, Shopify is the second-largest publicly traded Canadian company by market cap; only the Royal Bank of Canada is bigger.
Data from 2024 shows that Shopify then hosted 5.6 million active stores, spread out over more than 175 different countries. If we look at the yearly financial report for 2023 we see a total revenue of $7.1 billion and a Gross Merchandise Volume (GMV) of $235.9 billion.
The roots of Shopify go back to 2006, when it was launched by the computer programmer Tobias Lütke and his business partners. Two years prior, Lütke, Lake and Daniel Weinand had opened an online snowboard shop (Snowdevil), and quickly growns dissatisfied with the available e-commerce solutions for web shops. Lütke built a proprietary e-commerce platform for Snowdevil using Ruby on Rails. The platform worked out well, and Shopify was created to market it.
Shopify went public in 2015, but Lütke still ownes 7% of shares outstanding – and controls a 40% voting interest. This is possible due to Shopify´s two-class voting structure. The iShares S&P/TSX Capped Information Technology Index ETF only owns Shopify shares of the Shopify Subordinate Voting class.
Shopify Inc. Class A Subordinate Voting Shares are listed on both the Toronto Stock Exchange and Nasdaq.
TSX:SHOP (Class A)
Nasdaq: SHOP
SHOP is a component of the indices S&P/TSX 60 and Nasdaq-100.
Technology
The e-commerce platform Shopify was originally built on Ruby on Rails, using a single MySQL instance. In 2014, sharding was introduced to distribute Shopify to multiple databases. Later, Shopify moved to fully isolated instances.
Shopify maintains Hydrogen, an open-source headless JavaScript stack created in 2021. It is used for Shopifys client-facing storefront applications. Developers can deploy their Hydrogen applications to Oxygen, which is Shopify´s managed hosting and content delivery network.
In 2025, the migration of apps to ReactNative was completed, which means that the same code can now be employed for all client platforms.
Constellation Software
Constellation Software is a diversified software company based in Toronto, Canada. Founded by the former venture capitalist Mark Leonard, the business model for Constellation Software is based on acquiring companies in the software industry and owning them long term. Most of the acquisitions are comparatively small (below $5 million) and the companies are usually vertical market software businesses. As of 2025, Constellation Software has been active for three decades and acquired well over 500 different businesses.
Even though most of the acquisitions are small, exceptions are made when the conditions are right. Two notable examples are Acceo Solution, which was acquired for $250 million in 2018, and Allscripts´ hospital business unit wich was acquired for $700 million in 2022. When it comes to acquiring successful businesses, Constellation Software is chiefly competing against privat equity and hedge funds.
Constellation Software was founded in 1995 and went public in 2006. The company is traded on the Toronto Stock Exchange (TSX:CSU) and is a constituent of the index S&P/TSX 60.
About BlackRock – The Manager of iShares S&P/TSX Capped Information Technology Index ETF
The iShares S&P/TSX Capped Information Technology Index ETF (ticker: XIT) is managed by BlackRock Canada, which in turn is a part of the U.S.-based company BlackRock, Inc.
Headquartered in New York City, but with clients in over 100 countries, BlackRock, Inc. is the world´s largest asset manager. In 2024, BlackRock, Inc. had 70 offices, in 30 different countries, and managed assets worth a combined 11.5 trillion USD.
BlackRock is one of the Big Three Index Fund Managers, with the other two being The Vanguard Group and State Street.
Background
Founded in 1988, BlackRock originated as a company that provided institutional clients with asset management services from a risk management perspective.
BlackRock and iShares
In early 2010, Barclay needed to raise capital in the aftermath of the 2008 financial crisis. To that end, they sold the entire Barclays Global Investors (BGI) unit – including iShares – to BlackRock, while simultaneously acquiring just nearly 20% ownership in BlackRock.
About iShares ETFs
Ishares ETFs is a collection of exchange-traded funds (ETFs) managed by BlackRock Asset Management Canada Limited. BlackRock acquired the business from Barclays in 2009.
At the time of writing, iShares is the world´s largest issuer of ETFs, and it is also the largest issuer of ETFs in the United States.
A majority of the iShares funds track either a stock market index or a bond market index, although you can also find actively managed non-index iShares funds.
Stock Exchanges
Examples of stock exchanges around the world where iShares funds are traded:
- The New York Stock Exchange
- The American Stock Exchange
- The London Stock Exchange
- The Toronto Stock Exchange
- The Hong Kong Stock Exchange
- The Australian Securities Exchange
- The Mexican Stock Exchange
- The B3 Stock Exchange in Brazil
History
The first ETF traded in the United States was the Standard & Poor’s Depositary Receipts (NYSE Arca: SPY), launched by State Street in cooperation with the American Stock Exchange. Today, this ETF is known as the SPDR S&P 500. Soon after the lauch of NYSE Arca: SPY, Morgan Stanley responded by launching their own series called World Equity Benchmark Shares (WEBS). The WEBS tracked Morgan Stanley´s own MSCI foreign stock market indices, and were developed in cooperation with Barclays Global Investors. While the NYSE Arca: SPY was a unit investment trust, the underlying vehicles for each of the WEBS were mutual funds.
In the 2000s, Barclays put a lot of resources into growing the ETF market and launched over 40 new ETFs, calling the new series iShares. Soon, the WEBS were renamed iShares MSCI Series and brought in under the same umbrella.
In 2006, iShares position as a leading ETF provider in Europe was solidified as iShares acquired the INDEXCHANGE ETF unit from the German bank HypoVereinsbank.
Canadian iShares
When Canada removed the limits for foreign holdings in Canadian registered retirement savings pland (RRSP), it made the Canadian market even more interesting to the big ETF providers. RRSP:s are Canadian accounts where the assets are intended for retirement income, but accessible at any time.
To distinguish the Canaduan iShares from the U.S. products, Barclays provided them with currency hedging features.
BlackRock Acquires iShares
In 2009, Barclays announced plans to sell iShares to the private equity firm CVC Capital Partners. This prompted BlackRock to make a bid for the whole parent division Barclays Global Investors – including iShares. Eventually, a mixed cash-stock deal involving nearly 38 million shares of common stock and 6.6 billion USD in cash too place.
Technology Funds: Structure, Strategy, and Performance Dynamics
Technology funds are mutual funds or exchange-traded funds (ETFs) that concentrate on equities within the technology sector. These funds offer investors exposure to companies involved in software, hardware, semiconductors, IT services, cloud computing, artificial intelligence, and related industries.
Typically handled by professional portfolio managers, technology funds can be actively or passively managed, with the former relying on manager discretion and the latter tracking indices such as the Nasdaq-100 or S&P 500 Information Technology sector.
While the definition of a “technology company” can be elastic, most tech funds follow GICS (Global Industry Classification Standard) or similar frameworks for sector delineation. This focus on a single sector makes technology funds inherently more volatile than diversified equity funds but also positions them to outperform in growth-driven economic cycles.
Investment Philosophy and Portfolio Composition
The core investment philosophy of most technology funds revolves around capturing long-term growth driven by innovation, scalability, and technological disruption. Many of the underlying holdings exhibit above-average revenue growth and reinvestment rates, with comparatively lower dividend yields.
Valuations often reflect future earnings potential rather than current profitability.
Portfolio composition varies depending on the fund’s specific mandate, with some focused narrowly on sub-sectors like semiconductors or cybersecurity, and others spreading capital across large-cap tech conglomerates and emerging high-growth startups.
Geographic concentration is often tilted heavily toward the United States, especially the Nasdaq exchange, though some global funds include exposure to Asian and European tech companies. The sector’s dependence on intangible assets and intellectual property means that balance sheets and income statements must be evaluated differently than in traditional industries.
Risk Factors and Sector-Specific Volatility
Technology funds are subject to sector-specific risks that distinguish them from broader equity investments.
- Valuation risk is prominent, especially in bull markets where investor expectations can inflate price-to-earnings ratios to unsustainable levels.
- Regulatory risk is another concern, particularly in areas like data privacy, antitrust enforcement, and digital taxation.
- Geopolitical tensions can affect global supply chains, particularly in semiconductors, where manufacturing and fabrication are concentrated in a few key regions.
- Currency risk needs to be considered for funds with international holdings or indirect exposure to serious currency risk.
- The pace of innovation introduces execution risk, where companies with promising ideas can fail to commercialize or maintain market leadership.
- High correlation within the sector means that shocks to one major firm can reverberate across the fund’s holdings, amplifying volatility. While diversification within a tech fund can provide some cushioning, it does not eliminate the cyclical and thematic concentration inherent to the strategy.
Performance Patterns and Economic Sensitivity
The performance of technology funds is highly sensitive to macroeconomic trends, interest rate expectations, and market sentiment toward growth versus value investing. In low-rate environments, tech funds tend to outperform as future earnings are discounted more favorably. Conversely, rising interest rates tend to suppress valuations, disproportionately impacting high-multiple stocks. Historically, the technology sector has led bull markets but has also experienced sharper drawdowns during corrections, most notably during the dot-com crash and the 2022 growth stock sell-off. Over longer periods, however, technology funds have delivered substantial returns, often outperforming the broader market due to the sector’s structural advantages in scalability and operating leverage. Active managers may outperform passive benchmarks in volatile periods by adjusting factor exposures or risk allocations, though consistent outperformance is rare and often cyclical.
Strategic Role in Portfolios
Technology funds are typically used as growth engines within broader equity portfolios. Their long-term return potential makes them suitable for investors with higher risk tolerance and longer investment horizons. They may also be used tactically in response to specific trends such as cloud adoption, AI development, or 5G infrastructure deployment. However, the strategic allocation must consider overlap with broader market funds, especially those tracking indices with significant tech exposure. Due to their performance skew, tech funds can dominate portfolio returns in rising markets but may introduce concentration risk. Investors often mitigate this by pairing tech exposure with defensive sectors or value-oriented holdings to stabilize returns across market cycles. In retirement or income-focused portfolios, technology funds typically play a smaller role unless they are part of a multi-sector growth sleeve.
Regulatory Environment and Market Evolution
The regulatory environment surrounding technology companies is evolving rapidly, particularly in the U.S., EU, and China. Antitrust action, platform regulation, and data governance have emerged as significant factors influencing valuations. For fund investors, these developments introduce headline risk that can manifest suddenly and affect large portions of the portfolio. Additionally, shifts in global supply chain policy—such as onshoring semiconductor fabrication or export restrictions on advanced chips—can affect revenue projections and investment narratives.
The rise of ESG (Environmental, Social, Governance) frameworks has led to greater scrutiny of tech firms, particularly in labor practices, AI ethics, and data usage. Some technology funds now incorporate ESG screens, while others exclude companies based on sector-agnostic ESG scores. With that said, it looks as if we are seeing a backlash against ESG focused investing now as we enter the mid-2020s.
In April 2025, Morningstar published a report where they highlighted how an already ongoing flight from ESG funds had intensified during the early part of U.S. President Dolad Trump´s second term. According to Morningstar´s Global Sustainable Fund Flows Report for Q1 2025, global sustainable funds had faced a record outflow of $8.6 billion for the first quarter of 2025, reversing $18.1 billion in inflows from the previous quarter. The trend was not something new, as investors in the U.S. had been pulling money away from sustainable funds for 9 consequtive quarters already. In Europe, Q1 2025 became the first net outflow for the sustainable fund sector since 2018. Q4 2024 had a $20.4 billion inflow, while Q1 2025 resulted in $1.2 billion being withdrawn. According to the Morningstar report, two contributing factors to the ESG exodus were higher interest rates and President Trump´s policies. At the end of Q1 2025, U.S. investors held $330 billion in ESG funds, which was roughly 10% of the global total for ESG funds. Even before Trump´s second term commenced, 19 Republican-led states had adopted at least some type of so-called “anti-ESG legislation”. It should be noted however, that some Democratic-led states – including California which is a huge economy – have implemented “pro-ESG legislation”.
Manager Selection and Benchmark Considerations
Selecting a technology fund involves evaluating the manager’s track record, investment process, and consistency relative to benchmarks. Actively managed funds vary widely in their sector and style tilts, making peer comparisons difficult without disaggregating performance drivers. Passive options, including ETFs that track broad or niche tech indices, offer transparency and low cost but limit flexibility. Investors should scrutinize expense ratios, turnover rates, and historical tracking errors.
Benchmark alignment is especially important in technology investing due to the rapid evolution of the sector. A fund benchmarked to an outdated index may miss exposure to emerging subsectors. Investors must also monitor rebalancing practices, as some indices have semi-annual or quarterly updates that influence fund composition.
Technology Funds vs. Individual Shares: Strategic Trade-offs in Tech Investing
Investing in the technology sector presents two primary avenues: buying technology-focused funds (such as mutual funds or ETFs) or investing in individual tech stocks and build your own portfolio from scratch. Each approach carries distinct advantages, limitations, and suitability depending on the investor’s experience, time commitment, risk appetite, and overall portfolio strategy. While both offer exposure to the long-term growth and innovation-driven upside of the sector, they do so through fundamentally different mechanisms.
Diversification vs. Concentration
One of the clearest differences between technology funds and individual stocks lies in diversification. A technology fund, even one focused on a narrow sector, holds a basket of companies, thereby distributing exposure across multiple firms, and sometimes also across multiple subsectors and geographies. This reduces the impact of poor performance from any single holding. For investors concerned with volatility mitigation or portfolio balance, funds provide a structured way to reduce single-stock risk without extensive research or active monitoring. Of course, you always need to study the fund before you invest – some funds have a very limited scope, and will only invest in a handful of companies, providing very little diversification.
If you are a new investor just starting out, and without access to a lot of money, investing in a fund makes it easier to obtain diversification from day one. Investing in individual stocks will require more capital up front, unless you have a broker that allows you to invest in factional shares. Chasing penny stocks just to afford diversification is not recommended. For most small-scale investors, a fund is the easiest solution to get adequate diversification right from the start.
Investing in individual technology shares is inherently concentrated, at least until you have managed to build a large portfolio. Even a portfolio of a few different tech stocks can carry significant idiosyncratic risk—earnings surprises, regulatory shocks, or competitive missteps can have a huge impact. However, with concentration also comes the potential for outsized gains if one correctly identifies and times high-growth names. Individual stock investors assume higher risk but also maintain the flexibility to tailor positions more precisely based on their convictions.
Control, Customization, and Active Management
Investing in individual shares allows for granular control. Investors can choose exactly which companies to own, how much capital to allocate to each, and when to buy or sell. This appeals to those with strong opinions on specific business models, management teams, or emerging technologies. It also allows for tactical flexibility, such as exiting positions quickly in response to news or adding to a stock during a drawdown. This level of control is not possible in a fund, where investors are subject to the manager’s decisions or the index methodology.
With a fund, you trade control for simplicity and scale – and sometimes also for someone elses expertise when it comes to picking investments. For investors lacking the time, knowledge, or interest to analyze individual companies, a fund offers exposure without requiring ongoing management.
If you go with a passively managed index funds, it will automatically rebalance, maintain position sizing, and aim to track the selected index – which in turn can be an index tha tracks the broader performance of the sector.
If you go with an actively managed fund, you place your trust in the hands of the fund managers which will decide how to invest; within the parametres set by the fund prospect. Actively managed funds tend to come with higher fees and sometimes also less transparency.
Cost Structure and Taxes
Technology ETFs generally have low management fees, especially passive index trackers. However, investors must still account for fund-level capital gains distributions, which can create unexpected tax liabilities, particularly in mutual funds with higher turnover.
Individual shares, on the other hand, incur transaction costs only when trades are made. Capital gains are realized only upon sale, giving investors greater control over the timing and management of tax exposure. For investors using taxable accounts and implementing tax-loss harvesting strategies, individual stocks offer more flexibility, but they also require more record-keeping and planning. How dividends from dividend-paying stocks are taxed can vary significantly depending on the jurisdiction.
Risk and Behavioral Discipline
Tech stocks tend to be volatile, especially among smaller, high-growth names or those tied to emerging themes such as artificial intelligence or quantum computing. This volatility can test investor discipline. A diversified fund reduces the emotional impact of one stock’s collapse but also dilutes the return from a breakout performer.
Individual stockholders are often more exposed to the investor´s own behavioral biases, such as overconfidence, loss aversion, or anchoring. Holding a fund can help enforce discipline by avoiding concentrated bets or reactive selling. Investors who struggle with emotional decision-making may benefit from the automatic structure and longer-term orientation of funds.
With that said, exchange-traded funds (ETFs) are traded on exchanges in a manner very similar to stocks, and can trigger the same behaviors.
Information Access and Analytical Requirements
Analyzing individual companies in the technology sector requires a degree of familiarity with business models, financial statements, competitive dynamics, and sector-specific terminology. While resources are widely available, forming a coherent thesis on a stock is time-intensive. Understanding enterprise software, chip fabrication, cloud computing economics, or cybersecurity trends takes more than a surface-level review.
Funds remove this analytical burden by relying on professional management or index construction. Investors gain exposure to the broader sector trend without needing to distinguish between winners and losers. For those without a strong informational edge, fund investing reduces the risk of misjudging complex companies or overreacting to news cycles. Still, you need to be knowledgeable enough to evaluate the funds themselves, and find the ones that are reputable and aligns with your investment goals.
Strategic Portfolio Context
From a broader portfolio perspective, technology funds are often used as sector tilts within diversified equity allocations. They allow investors to express a view on the sector without overweighting any single company. This is particularly useful in retirement accounts, risk-managed portfolios, or institutional mandates where single-stock exposure may be prohibited.
Individual tech stocks may play a role in concentrated strategies, thematic investing, or speculative allocations. They offer alpha potential but require more oversight. Investors pursuing such strategies must be prepared for larger drawdowns and accept that underperformance is possible even if the overall sector is performing well.
Alternatives to Technology Funds: Diversifying Beyond The Tech Sector
If you currencly have a concentrated exposure to technology funds, you may wish to consider a few broader diversification strategies to reduce your sector-specific risk, balance cyclical exposure, and enhance long-term return stability. While technology equities have delivered strong performance over multiple decades, their growth orientation, high valuation sensitivity, and correlation with market sentiment introduce volatility that may not align with all portfolio objectives. Diversification does not have to go hand in hand with dilution of returns; rather, it aims to reduce reliance on a narrow set of factors or economic outcomes. The challenge lies in identifying complementary assets that behave differently under varying conditions while maintaining acceptable liquidity, transparency, and cost.
Diversification is not static. It requires ongoing evaluation, rebalancing, and reassessment of long-term objectives. Portfolios that become overly concentrated in technology due to strong relative performance should be reviewed periodically to realign with the investor’s risk tolerance and time horizon. Rebalancing back to target allocations forces investors to sell high-performing assets and redeploy capital into underweighted areas, promoting discipline and long-term consistency.
Allocation frameworks can be built using core-satellite models, risk-parity principles, or return-based optimization depending on investor sophistication. The inclusion of non-tech sectors, asset classes, and strategies must align with the overall risk-return profile, tax considerations, and liquidity needs. Diversification alone does not guarantee returns, but when implemented thoughtfully, it enhances portfolio resilience across market regimes.
Sector Rotation and Defensive Allocations
One of the most direct ways to diversify away from technology funds is to allocate capital to other equity sectors with differing factor exposures. Sectors such as consumer staples, utilities, and healthcare tend to exhibit defensive characteristics, with lower volatility and more stable earnings across market cycles. These sectors often include dividend-paying companies with predictable cash flows, which can provide income and mitigate drawdowns during periods of elevated market stress. While these sectors may underperform during speculative or high-growth phases, their inclusion in a portfolio can improve risk-adjusted returns over time by smoothing out periods of technology underperformance.
Industrial and financial sectors offer more cyclical exposure but tend to be driven by different macroeconomic variables than technology. For example, financials are sensitive to interest rate changes, while industrials benefit from infrastructure investment and capital expenditure cycles. Incorporating these sectors can balance the macro exposures inherent in a technology-heavy portfolio, especially during periods of rising rates or fiscal stimulus.
Geographic Diversification
Technology funds, particularly those focused on the U.S. or Canada, often exhibit geographic concentration due to the dominance of domestic tech companies in major indices. Expanding exposure to international equities can reduce this concentration and introduce different economic drivers into the portfolio. European and Japanese markets tend to have higher weightings in industrials, materials, and consumer staples, offering structural diversification relative to tech-centric benchmarks.
Adding some emerging markets to your portfolio can also be a good idea. They tend to offer long-term growth potential and demographic tailwinds, though they also come with higher volatility and political risk. Exposure to markets with less-developed technology sectors can help offset the performance patterns of U.S. and Canadian tech holdings.
Investors who are used to focusing on their own domestic market should inform themselves about currency risk before adding foreign exposure, especially if underlying assets are denominated in foreign currencies and not hedged. Regional allocation decisions should also consider relative valuations, interest rate policy, and local economic fundamentals.
Style and Factor-Based Strategies
Another route to diversification is through style-based or factor-driven equity strategies that emphasize characteristics such as value, size, quality, or low volatility. These approaches seek to capture long-term performance drivers that behave differently than the growth and momentum factors that dominate the technology sector. Value-oriented strategies, for instance, focus on companies trading at lower price-to-earnings or price-to-book ratios, which often include sectors like energy, financials, and industrials. Historically, value and growth have exhibited periods of inverse performance, providing natural offset during regime shifts.
Quality and low-volatility strategies can further stabilize a portfolio by emphasizing companies with strong balance sheets, stable earnings, and defensive characteristics. These strategies tend to lag in speculative markets but outperform during downturns. The inclusion of multifactor ETFs or actively managed funds that incorporate systematic diversification rules can provide exposure to these attributes without requiring sector-specific allocations.
Looking Beyond Equities
While equity diversification is critical, true portfolio resilience often requires exposure to different asset classes altogether.
Fixed Income
Fixed income instruments such as government bonds, investment-grade corporate debt, and inflation-linked securities can provide downside protection, especially in environments characterized by risk aversion or economic contraction. The correlation between bonds and equities is not constant but tends to turn negative during sharp equity drawdowns, making fixed income an effective buffer in risk-off scenarios.
Real Estate and Other Real Assets
Real assets, including real estate investment trusts (REITs), infrastructure, and commodities, can offer inflation protection and returns driven by different supply-demand dynamics than financial assets. These exposures tend to have low correlation with technology equities, especially during periods of rising inflation or commodity cycles. Allocation to real assets must be weighed against their liquidity profile and sensitivity to interest rate changes, particularly in the case of REITs.
Alternative Strategies and Absolute Return Vehicles
Investors seeking diversification beyond traditional beta exposure may consider alternative strategies, including market-neutral funds, long-short equity, managed futures, or multi-strategy hedge fund vehicles. These strategies aim to generate absolute returns with low correlation to traditional assets, though they often come with higher fees, complex structures, and performance dispersion. They can provide meaningful risk diversification when implemented with discipline and transparency but may not be suitable for all investors due to complexity and limited accessibility. Absolute return strategies are particularly useful in navigating low-return environments or periods of high uncertainty, where directional equity exposure may struggle. Their role in a diversified portfolio is not to outperform in bull markets but to preserve capital and deliver positive returns when other asset classes underperform.