What to Look for in a Technology ETF

February 20, 2014

When diving into the technology sector, investors are bombarded with thousands of stocks to choose from. Nevertheless, with exchange traded funds, anyone can take a broad, diversified approach to this growth sector.

There are a number of tech ETFs available, so investors should take the time to differentiate between the funds, writes John Jacobs, executive vice president of the NASDAQ OMX Group, for Forbes.

Due to the transparent nature of ETFs, investors are able to make an informed decision before investing in any tech fund.

“When allocating to a technology-focused ETF, key considerations should include (1) index selection (2) fund size and (3) strategy,” Jacobs said.

For starters, the Technology Select Sector SPDR (XLK) , one of the oldest and largest tech-related ETFs, tracks a cap-weighted index and provides exposure to technology names from the S&P 500 index. Consequently, nearly a quarter of the fund’s total weight is in Apple (AAPL) and Google (GOOG). [Of Google and ETFs]

However, tech companies listings are not limited to the S&P 500, so XLK leaves out small- and mid-cap names.

Alternatively, the First Trust Technology AlphaDEX Fund (FXL) follows a smart-beta index that overweights companies with strong fundamental attributes, such as 12 month price appreciation, return on assets, book value to price and cash flow to price ratios, and includes a basket of small- to large-cap companies.

Diving deeper into the tech sector, investors can gain exposure to more targeted sub-sector ETFs. For instance, the First Trust Dow Jones Internet Index Fund (FDN) and PowerShares NASDAQ Internet Portfolio (PNQI) both focus on Internet-related businesses, such as Facebook (FB), Amazon (AMZN), eBay (EBAY) and GOOG. Due to their more specialized strategies, FDN and PNQI come with a more expensive 0.60% expense ratio, compared to broad-based ETFs.

Additionally, some tech stocks offer dividends, and the First Trust NASDAQ Technology Dividend Index Fund (TDIV) provides targeted exposure to tech names that have a consistent history of paying dividends. TDIV shows a 12-month yield of 2.4%. [Digital Dividends in an ETF]

For more information on the tech sector, visit our technology category.