4 ETFs for the Hot Tech Sector

TheStreet.com

NEW YORK (TheStreet) -- The information technology sector has quickly become the early-year rally's darling.

With companies like Apple ascending to breathtaking heights, talk of Facebook's anticipated IPO still finding its way into the discussion, and growing confidence driving individuals into market-correlated sectors, it is no wonder that stock traders, market commentators, and analysts can't get enough of this market region.

Evidence of tech's popularity and success has shown through in recent days with the Nasdaq index breaking to 3,000. This move, which follows close on the heels of the Dow Jones Industrial Average's ascension to the 13,000 level, marks the first time this point has been breached since the turn of the new millennium.

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Debate has raged among some commentators as to which of these psychologically and historically noteworthy milestones is more important. In my opinion, I feel that both provide encouraging evidence as to how far we have come since the depths of the Great Recession.

Despite its popularity, the technology sector is not one that investors can approach unprepared. Given the slew of option at our disposal, investors must be aware of their own risk tolerances and investing goals when constructing a proper game plan.

With ETFs, investors can tweak their portfolios to how they see fit. For example, when it comes to targeting the technology sector, individuals can use single subsector instruments in order to take aim at corners that appear most promising, while at the same time underweighting laggard regions. Thanks to their uniqueness and specificity, funds like the Global X Social Media ETF and the First Trust ISE Cloud Computing Index Fund are well-designed for those looking to inject a dose of personality into their investment strategy.

This is not to say that such an approach is suitable or appropriate for all investors. On the contrary, concentrated instruments like those highlighted above are inherently volatile and therefore should only be used by experienced, risk-tolerant investors. Even those who may be able to stomach the bumps along the road should only set aside small slices of their portfolios to these funds.

Investors looking for a safer tactical technology ETF should turn their attention to the First Trust Dow Jones Internet Index Fund. Although, like SKYY and SOCL, FDN is designed to take aim at a specialized corner of the IT sector, in the past we have seen how relatively stable the fund can be. The fund's size, volume, and dedication to large, well-known names like Amazon, eBay and Google will help ensure the type of stability that will come in handy in the event of a sweeping market breakdown.

Whereas funds like SKYY, SOCL, and even FDN are best used in small doses, the PowerShares QQQ is a product I have traditionally felt comfortable using more liberally.

On a number of occasions, I have turned to this product when constructing the core portion of client portfolios. Designed to track the iconic Nasdaq index, the Qs offer expansive exposure to top names in the technology sector. The fund is not solely dedicated to companies like Microsoft, Oracle and Intel, however. Rather, it spreads its assets into all market corners, making it an attractive broad market play for technology enthusiasts.

QQQ could have a problem in the future. As top holding Apple has ballooned in size, it has dominated an increasingly overwhelming slice of the fund's index. Currently, the Cupertino-based consumer giant accounts for 17.5% of its total assets. Apple may have some fuel left in its tank with talk of the iPad 3 beginning to build. However, given this type of top-heavy exposure, if a serious shakeup were to occur in the weeks and months ahead, I may be forced to reconsider the fund's appropriateness as a major portfolio holding.

2012 will likely hold a number of exciting developments for the technology industry. With proper planning and plenty of patience, it is possible for retail investors to take advantage of major events down the road.

-- Written by Don Dion in Williamstown, Mass.
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