Our Favorite Tech ETF: A Low-Cost Way To Tap Into Mobile-Computing Growth

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By Morningstar :

By Robert Goldsborough

AAPL


QCOM BRCM

Vanguard Information Technology ETF( VGT )

XLK

Fundamental View
The single largest dynamic affecting the U.S. technology sector right now is the ongoing shift toward mobile computing and the growth in cloud computing. Mobile and cloud computing are truly a disruptive force in the tech sector. As users shift to mobile devices, PC sales continue to fall. Morningstar's equity analysts expect global PC shipments to drop 8% this year, with the multiyear declines in developed markets now being accompanied by moderate declines in emerging markets. Despite declines in PC sales, the total number of devices sold actually is expected to rise meaningfully in the years to come, as consumers and businesses adapt to smartphones and tablets. In fact, our analysts project that in 2017, some 2.6 billion-plus computing devices will ship--more than twice the total number of devices that shipped in 2012.

Portfolio Construction

Fees
This ETF carries a 0.14% expense ratio, which is lower than all other technology-sector ETFs. The fund's estimated holding cost is 0.14%, suggesting that this fund has tracked its index very well. Estimated holding costs are primarily composed of the expense ratio but also include transaction costs, sampling error, and share lending revenue.

Alternatives
Investors seeking technology-sector exposure can consider two other heavyweight technology ETFs: Technology Select Sector SPDR ETF and iShares U.S. Technology Sector Index(IYW) , which cost 0.18% and 0.45%, respectively. Although all three funds' weightings of the top-five holdings generally are comparable, there are important differences. The SPDR is a much more concentrated portfolio (73 names) and tilts far more to large-cap names (average market cap: $103 billion), while the iShares offering falls somewhere in the middle from a diversification standpoint (142 companies) and as a result has a lower, $83 billion average market cap. There are other differences. The Vanguard fund has a large weighting (9%) in IT services firms such as Visa(V) and Accenture(ACN) and holds no telecommunication services companies such as AT&T(T) and Verizon(VZ) . XLK holds IT services companies such as Visa and MasterCard(MA) and telecommunications services firms such as AT&T and Verizon. IYW, by contrast, holds no IT services companies or telecommunications services firms, thereby making it the purest-play broad technology ETF. Despite these differences, the performances of the three ETFs--VGT, XLK, and IYW--are almost perfectly correlated. Over the past five years, VGT and IYW are 100% correlated, VGT and XLK are 99% correlated, and XLK and IYW are 99% correlated.

Disclosure : Morningstar, Inc. licenses its indexes to institutions for a variety of reasons, including the creation of investment products and the benchmarking of existing products. When licensing indexes for the creation or benchmarking of investment products, Morningstar receives fees that are mainly based on fund assets under management. As of Sept. 30, 2012, AlphaPro Management, BlackRock Asset Management, First Asset, First Trust, Invesco, Merrill Lynch, Northern Trust, Nuveen, and Van Eck license one or more Morningstar indexes for this purpose. These investment products are not sponsored, issued, marketed, or sold by Morningstar. Morningstar does not make any representation regarding the advisability of investing in any investment product based on or benchmarked against a Morningstar index.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Technology

Referenced Stocks: AAPL , BRCM , QCOM , VGT , XLK

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