Technology ETFs Still Leading Indicator

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Technology has led the market both up and down in the past three years. During this slow recovery it is once again playing its role as market bellwether.

During the 2009/2010 rebound, technology ETFs pulled away from their large cap cousins and stayed ahead. The May swoon punished the general market and technology about equally, reflecting economist predictions and investor sentiment that growth will cool but not fall into a double dip recession:

SPY is a S&P 500 proxy above, and the other ETFs are broad-based technology ETFs with moderate fees:

  • SPDR Technology Select Sector ETF ( XLK ); 0.24% annual fees
  • iShares Dow Jones US Technology Sector ETF (NYSEArca:IYW); 0.48%
  • SPDR Morgan Stanley Technology ETF ( MTK ); 0.5%
  • Vanguard Information Technology ETF ( VGT ); 0.25%
  • NASDAQ 100 Tracking ETF (NasdaqGM: QQQQ); 0.20%

  • SPDR Technology Select Sector ETF ( XLK ); 0.24% annual fees
  • iShares Dow Jones US Technology Sector ETF (NYSEArca:IYW); 0.48%
  • SPDR Morgan Stanley Technology ETF ( MTK ); 0.5%
  • Vanguard Information Technology ETF ( VGT ); 0.25%
  • NASDAQ 100 Tracking ETF (NasdaqGM: QQQQ); 0.20%
  • SPDR Technology Select Sector ETF ( XLK ); 0.24% annual fees
  • iShares Dow Jones US Technology Sector ETF (NYSEArca:IYW); 0.48%
  • SPDR Morgan Stanley Technology ETF ( MTK ); 0.5%
  • Vanguard Information Technology ETF ( VGT ); 0.25%
  • NASDAQ 100 Tracking ETF (NasdaqGM: QQQQ); 0.20%
  • Technology compares favorably to many other economic sectors. It is less dependent on debt financing and therefore less affected by the tightening of lending. This sector exports heavily and has diversified revenue streams. No company today can afford to be without up-to-date computers and software, and the US leads in innovation in this area. Unfortunately in the US and Europe, capital spending by companies and discretionary spending by consumers remains tightfisted. Tech will see revenue growth but with greater delay in this recovery.

    In the past investors paid dramatically more for growth, but at the moment technology commands a Price/Earnings of about 18, while a dollar of earnings in the S&P 500 requires 15. Compared to historical averages tech valuations are moderate, and they should be. Analysts say technology is showing all the hallmarks of a maturing industry: slowing growth and shrinking margins.

    In the ETF world technology is generally defined as computer hardware and software, networking, and sometimes telecom.

    Perhaps the most famous tech ETF is not pure technology. PowerShares QQQ (NasdaqGM: QQQQ) gained glory and then infamy during the Dot Com Boom and Bust, but it is only an index of large NASDAQ-listed stocks which happens to contain important tech names such as Microsoft. While not suitable for accurate asset allocation, the index correlates fairly well with pure tech, is easy to follow and has deep liquidity. Fees are light at 0.20%

    For NASDAQ officionados, First Trust NASDAQ-100-Tech Index (NasdaqGM:QTEC) will filter out non-technology firms from the NASDAQ at a steep 0.60% per year.

    Technology sub-index ETFs include First Trust Dow Jones Internet ETF ( FDN ) and SPDR S&P Semiconductor ETF ( XSD ) which is fairly priced at 0.35% per year. These are among the most volatile sectors in technology.

    In addition to plain-vanilla ETFs, Invesco PowerShares has a line of which use fundamental financial ratios to compete with tech indexes and sub-indexes (PSI, PSJ, PNQI, PXQ and PTF). There are also leveraged ETFs from ProShares (USD, ROM, SSG, REW) and an equal weight ETF from Rydex ( RYT ). Finally, there are international technology ETFs from iShares ( IXN ) and WisdomTree ( DBT ).

    Co-founder of indexfunds.com, author of two books on investing, and founder of ETFzone.com, Will has been writing on indexing issues for 8 years. He holds an MBA from the University of Texas at Austin.

    Co-founder of indexfunds.com, author of two books on investing, and founder of ETFzone.com, Will has been writing on indexing issues for 8 years. He holds an MBA from the University of Texas at Austin.



    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


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