Technology rarely comes to mind when you're looking for value in
the stock market. That said, this year, that happens to be the
case-an interesting twist considering how much the recession has
created pent-up spending on everything from new computers to
With the exception of the six months between the Lehman Brothers
collapse and the March 2009 bottom, technology stocks are trading
at their lowest valuation levels since 1992. Bloomberg data show
tech firms included in the S&P 500 trading with a
price-to-earnings ratio of 15.6 based on reported annual
In other words, because the entire sector is trading at such
attractive valuations, it's a perfect situation to own a technology
ETF, which enables you to avoid taking the company-specific risk of
owning an individual stock by owning a security that encompasses
the entire sector.
There's one catch. With over 25 technology ETFs available, the
selection process is integral in meeting the needs of your
Technology ETF Choices
The largest technology ETF based on assets is the Technology
Select Sector SPDR ETF (NYSEArca:XLK), which fell 4.4 percent this
year through July, lagging the S&P 500's return of -1.2
XLK is very heavily weighted toward the large-cap technology
names such as Apple (NasdaqGS:AAPL), Microsoft (NasdaqGS:MSFT) and
). The top three names make up 27 percent of the entire ETF. This
lack of stock diversification is mitigated by the fact that the
fund doesn't have more than 20 percent in one industry. The expense
ratio is a low 0.21 percent, and the ETF is composed of a total of
The iShares Dow Jones US Technology ETF (NYSEArca:IYW) is nearly
a mirror image of XLK, with identical top holdings. The two major
differences are the expense ratio that is more than double, at 0.48
percent, and the number of holdings (162).
The Vanguard Information Technology ETF (NYSEArca:VGT) is the
last of the "three amigos" and also shares the top holdings, with
an expense ratio of 0.25 percent.
With XLK and VGT similar in holdings and fees, it comes down to
volume for me, and XLK is the more liquid of the two ETFs.
I also want to point out two ETFs that focus on companies
outside the U.S-one exclusively and one a lot less so.
First, there's the SPDR S&P International Technology Sector
ETF (NYSEArca:IPK), which has zero exposure to the U.S. and more
than 50 percent in Asia. Japan makes up the majority with 42
percent, followed by South Korea at 16 percent. The ETF holds a
total of 106 stocks, with Samsung the largest holding by far at 14
percent. I mention that because the large allocation to a single
stock can be a concern.
The iShares S&P Global Technology Sector ETF (NYSEArca:IXN)
calls itself global, but with 74 percent of its assets in the U.S.
and the same top three holdings as its U.S. counterpart (
), the name is a misnomer. Of the top 10 holdings, only two are
based outside the U.S. and, not including Japan, the ETF's
international exposure is a mere 16 percent.
Investors looking to gain true international exposure have to
tilt toward IPK over IXN because IXN will simply give you overlap
to the U.S.-based technology ETFs.
Niche Technology ETFs
Within the technology sector there are individual industries
that are covered by niche ETFs.
One of the most popular is the Semiconductors HOLDRS ETF
(NYSEArca:SMH), composed of 18 stocks in the chip industry. Due to
the small number of stocks in the ETF, the top three make up over
half of the allocation. As such, SMH is not considered diversified
and is heavily dependent on the move of a small number of
One of my favorite technology ETFs is the iShares S&P
Software ETF (NYSEArca:IGV). It invests in 51 software-related
ETFs. The largest holding is only 9 percent of the allocation and
there's true diversification throughout one of the best-positioned
industries in the market.
As companies look to spend the record amount of cash on their
balance sheets, expect to see spending on technology, particularly
in software upgrades, as automation takes the place of human labor.
This transition won't be good for the unemployment rate, but it
does help improve the bottom line of the companies.
Overall spending by companies in all sectors of the market has
been stagnant for a few years due to the recession. As the economy
continues to improve, the spending will increase and technology
companies from software to hardware will be the big winners.
Matthew D. McCall is editor of The ETF Bulletin and
president of Penn Financial Group LLC, a Ridgewood,
N.J.-based wealth management firm specializing in investment
strategies using ETFs.
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