Technology ETFs Ride The Apple And Microsoft Surge

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It's a good time to think tech.

The sector reported robust Q2 earnings, pushing stocks to multiyear highs. The likes ofApple ( AAPL ),Microsoft ( MSFT ),Symantec ( SYMC ),Seagate ( STX ) andOracle ( ORCL ) have started to pay or are boosting dividends. The improving U.S. economy is sending corporate IT investments higher. And fall will bring a parade of tech product releases for the holiday season, likely giving stocks a neat fourth-quarter bump.

"Megacap information technology stocks have been outperforming the broader market," said Todd Rosenbluth, director of ETF research for S&P Capital IQ. "Apple posted stronger-than-expected second-quarter earnings, while Microsoft announced a restructuring that is being viewed favorably."


ETFs with big stakes in these companies are feeling the difference.Select Sector SPDR Technology (XLK), iShares Dow Jones U.S.Technology (IYW), iSharesS&P North American Technology (IGM) andVanguard Information Technology (VGT) are in strong uptrends. Apple and Microsoft are their largest holdings.

S&P Capital IQ is recommending that investors overweight their technology exposure.

Rosenbluth points to the sector's fundamentals, including strong balance sheets that will be used for value-added R&D, M&A, buybacks, dividends and debt retirement.

And valuations are favorable. "The sector trades at a price-earnings and PE-growth multiple that is lower than the broader market," he said.

Indexes Slow To Respond

Mainstream tech ETFs tend to be dated, with newer, cutting-edge companies often left out of the mix, says Charles Lewis Sizemore, a portfolio manager on Covestor, an online investment management company. For example, XLK owns familiar names such as Apple, Microsoft,Google (GOOGL) and evenFacebook (FB), but notTwitter ( TWTR ).

The underlying indexes reconstitute their holdings at a pace out of step with changes in the industry, Sizemore explained: "Tech companies can get very big very fast."

This year, semiconductor ETFs have outshone.SPDR S&P Semiconductor (XSD), iSharesPHLX Semiconductor (SOXX),Market Vectors Semiconductor (SMH) andPowerShares Dynamic Semiconductors (PSI) are all up more than 20% vs. a 9% gain for SPDR S&P 500 (SPY).

XSD, SMH and SOXX have healthy asset levels and trading volume.

Following The Leader

Fabless chipmakerCavium (CAVM), an IBD Leaderboard pick , has returned 58% year to date. The stock is 2% past a 53.42 buy point, leaving it in buy range. Cavium has an RS rating of 93 and an EPS rating of 96.

Demand for chips has accelerated this year as the PC industry stabilizes and China builds out its LTE mobile communications network.

Coupled with a lean inventory supply chain, this should contribute to a potential upside through 2015, in contrast with fairly muted growth from 2011 to 2013, says Angelo Zino, a technology analyst with S&P Capital IQ.

Investors can also look outside major tech-focused ETFs for exposure to the sector.PowerShares QQQ (QQQ), tracking the Nasdaq 100 Index, has 58% of assets in tech stocks.

Besides Apple and Microsoft, its top 10 holdings include social networking giant Facebook, another Leaderboard pick that is up 37% this year.



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 , ETFs

Referenced Stocks: AAPL , MSFT , SYMC , STX , ORCL

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