The health of the global economy, especially in developed
markets, is largely dependent on technology, which is driven by
innovation and expertise. The tech industry is the cluster of
software and services, technology hardware and equipment, and
semiconductors and semiconductor equipment. Currently, this segment
accounts for more than 20% of the S&P 500 benchmark. (Read:
Three ETFsTo Play The Tech IPO Boom
As the digital age dawns on us, the future of tech business
appears more reliant on software than equipment. In this
segment, companies like
International Business Machines Corporation
(MSFT) are leading the global technology industry.
In fact, the global software industry has bounced back from a
stagnant 2010, with a growth of 8.2% to $267 billion in 2011.
Furthermore, according to
research and markets
analysts, the industry is expected to reach $358 billion in 2015
and $462 billion by 2020.
Software development is now a key portion of modern technology.
The number of software applications has taken technology to new
heights. This corner of the market is seeing robust growth with a
wide variety of products and services, especially with SaaS
Additionally, rapid expansion of the internet in developing
markets, as well as the incredible growth of internet connected
devices have helped to keep software and related services in demand
despite slowdowns in other sectors of the economy. Now, with the
emergence of cloud computing worldwide, further growth could be had
in the software market in the future as well (Read:
Inside The Cloud Computing ETF (SKYY)
Currently, the global software market is dominated by China, the
world's second largest economy, followed by India. A large Internet
and mobile phone user base in these countries has helped spur
increased demand for software and related services and looks to
continue to be a source of profits for the industry in the coming
years, even if a broad slowdown afflicts these nations.
Thanks to these trends and the relatively solid outlook for the
tech industry, investors may want to consider this corner of the
market over the broad tech space. For investors seeking to play in
this sector, there are currently three ETFs, all targeting the
North American market which could make for excellent picks:
iShares S&P North American Technology-Software Index
This ETF is a passively managed fund and targets the U.S.
software market. It seeks to replicate the price and performance of
the S&P North American Technology-Software Index, holding 54
securities in total.
With AUM of $574.0 million, the fund offers exposure to software
companies that produce client/server, enterprise, Internet, PC and
entertainment software. Since the fund focuses on a particular
sector, it has limited scope and lacks diversification
The product allocates the majority of its asset (roughly 58%) to
top 10 holdings, with
(ORCL) being the top three. Since the fund consists of all cap
stocks, it has generated excellent returns of 11.68% year-to-date
Three Technology ETFs Outperforming XLK
The product also trades with good volume and is relatively
inexpensive charging 48 basis points a year. However, investors
should note that the product does have a meager 0.04% dividend
yield suggesting it won't be much of a source of current
PowerShares Dynamic Software Portfolio (
Launched in June 2005, PSJ is designed to provide capital
appreciation or returns of the U.S. software stocks. With total
assets of $47.7 million, the fund is a more volatile and less
liquid ETF in the software space and tracks the Dynamic Software
The stocks in the fund are evaluated on good investment merits
such as price momentum, earnings momentum, quality, management
action and value. The ETF uses a full replication strategy, holding
all 30 stocks in the index.
The product puts about 42% of its assets in the top 10
companies. Its top three holdings are
Activision Blizzard Inc.
The fund focuses primarily on companies that are engaged in the
research, design, production or distribution of products or
processes related to software applications and systems, and
information-based services. (See more ETFs in the
Zacks ETF Center
This ETF is appropriate for investors seeking broad exposure to
the U.S. software market with a focus on all cap equities. The
product is a high cost choice in the tech space as it charges 63
bps in fees per year. However, the fund has produced an impressive
return of 9.34% year-to-date but does not distribute dividends.
SPDR S&P Software & Services ETF (
Investors seeking exposure to all types of software services
including application software, data processing and outsourced
services, home entertainment software, Internet software and
services, IT consulting, and systems software may find State
Street's XSW an interesting option.
The product has total assets of $17.9 million under its
management and holds 137 securities in its basket. It puts less
than 10% of assets in top 10 holdings in equal weights of roughly
1% each, and is therefore, widely spread across various companies.
The top three companies are
Liquidity Services Inc.
The fund seeks to match the performance of the S&P Software
& Services Select Industry Index, which is the subet of the
S&P Total Stock Market Index. The fund does not fully replicate
the underlying index, and include cash and cash equivalents, money
market instruments and securities, which are not included in the
Three Great Tech ETFs That Avoid Apple
Small companies make up more than 50% share in the fund while
the large and medium companies take the remaining portion. The
product is less liquid, less volatile, and trades with a small
volume, roughly 4,000 shares per day.
However, XSW is cheap relative to the other two ETFs in the
software space. It charges a paltry fee of 35 bps a year. The
product has delivered good returns of 6.26% year-to-date but yields
an annual dividend of only 0.05%.
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INTL BUS MACH (IBM): Free Stock Analysis Report
ISHARS-SP SFTWR (IGV): ETF Research Reports
ORACLE CORP (ORCL): Free Stock Analysis Report
PWRSH-DYN SFTWR (PSJ): ETF Research Reports
SPDR-SP SOF&SER (XSW): ETF Research Reports
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