The technology sector since the beginning of the year has been
on the rise and has outperformed the S&P 500 index (
Three ETFs to Play the Tech IPO Boom
). But in the past few weeks and months, the trend for the sector
seemed to have changed. The sector has somewhat lost its way with
investors now shifting focus from technology to other
well-performing sectors like financials.
What has led to the change in momentum of the sector? It seems
that the fall in Apple's stock price and disappointing Google
results led to the tech based
to perform badly in recent weeks.
After all, Apple plays a dominant role in many of the tech
ETFs and accounts for a double digit allocation in at least a few
Three ETFs with the Most Apple Exposure
). In the past one month, the stock price of the giant company
has fallen double digits, even despite the strong EPS level and
new product launches.
So tech ETFs whose performance is largely tied to the
performance of Apple disappointed investors. To add to this,
Apple again reported disappointing results for the fourth
Another blow to the tech sector last week was the
disappointing Google results (
Three Tech ETFs Rocked by Google's Earnings
). The stock was the worst performing company in the S&P 500
on the day of earnings announcement.
This impacted all the ETFs having a significant exposure to
the company. Other tech company results like IBM and Microsoft
have been disappointing this quarter adding to the
underperformance of the tech ETFs in the past few weeks.
However, if we keep these short-term trends aside, the
technology sector is clearly a long-term growth prospect for
investors willing to remain invested. The sector should return to
their market dominance over time.
Cloud computing and mobility are some of the areas which
should provide a boost to its long-term growth prospects. Many
have viewed the sector with skepticism since the tech bubble
burst more than a decade ago, but times have clearly changed for
Given this, a look at some of the top ranked ETFs in the space
could be the way to target the best of the segment with lower
levels of risk.
About the Zacks ETF Rank
A look at top ranked Technology ETFs can be done by using the
Zacks ETF Rank. This technique provides a recommendation for the
ETF in the context of our outlook of the underlying industry,
sector, style box, or asset class. Our proprietary methodology
also takes into account the risk preferences of investors as
The aim of our models is to select the best ETFs within each
risk category. We assign each ETF one of five ranks within each
risk bucket. Thus, Zacks Rank reflects the expected return of an
ETF relative to other ETFs with a similar level of risk.
Using this strategy, we have found three ETFs which is Ranked
1 or 'Strong Buy' in the technology industry, which we have
highlighted in greater detail below:
Vanguard Information Technology ETF (
The fund manages a $2.7 billion asset base and provides
exposure to a large basket of 415 technology stocks. Although VGT
seeks to provide exposure to the entire technology sector,
software, hardware and Internet, still the fund appears to be
more tilted towards large caps. Small allocation has also been
made to mid caps and small caps (see
Mid Cap ETF Investing 101
Despite a broad exposure to technology stocks, VGT appears to
be concentrated in its individual holdings as the top 10 make up
60% of the total asset allocated. This suggests that company
specific risk is pretty high in the fund and the top 10 holdings
dominate the returns of the fund.
The highest fund allocation goes to Apple with 20.5% of asset
invested, which implies that the performance of the fund is
somewhat dependent on Apple's performance. The company's stock
price was on a downward trend in the past 1 month which hampered
the performance of those ETFs which have assigned the highest
weight to Apple.
This is followed by International Business Machines Corp. and
Microsoft with asset investment of 7.5% and 7.4%, respectively.
This tech ETF charges an expense ratio of 19 basis points on an
First Trust NASDAQ-100-Technology Sector Index Fund
First Trust NASDAQ-100-Technology Sector Index Fund has been
designed to replicate the performance of the
NASDAQ-100-Technology Sector Index. This tech ETF provides
exposure to a small basket of 44 technology stocks and manages an
asset base of $112.1 million.
The fund has largely allocated its asset base among two parts
of the market spectrum, large caps and mid caps, with large cap
accounting for 57% of the asset base. In style, both growth and
value stocks are equally preferred in the fund.
Among the top 10 holdings, the fund allocates just 25% of its
asset base, which implies that the fund's performance is not
dependent on the performance of the first 10 priorities. In this
fund, neither Apple nor Google gets an allocation, which reveals
that the fund's performance was not affected by the recent
downturn in these two stocks (
Three Great Tech ETFs That Avoid Apple
The fund appears to be a bit expensive charging a fee of 60
basis points from investors.
S&P North American Technology Sector Index Fund
S&P North American Technology Sector Index ETF seeks to
replicate the price and yield performance of the S&P North
American Technology Sector Index. The fund was initiated in March
2001 and since then has managed to build assets under management
of $498.5 million.
The product holds a total of 259 securities in which three
tech giants, Apple, Microsoft and International Business Corp,
hold the top three positions. The top three companies get a total
allocation of 32.9% while among others the fund does not appear
to invest more than 7.14% in any one stock.
The fund appears to be concentrated in the top 10 holdings
with more than 54% of the asset base invested in these securities
Zacks #1 Ranked Tech Sector ETF in Focus
From a market capitalization perspective, the fund appears to
be inclined to large market caps and allocates 80% of the asset
base to this level while mid caps and small caps get an
allocation of 13% and 6%, respectively. IGM charges an expense
ratio of 48 basis points from the investor.
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ISHARS-SP TECH (IGM): ETF Research Reports
FIRST N-100 TEC (QTEC): ETF Research Reports
VIPERS-INFO TEC (VGT): ETF Research Reports
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