Tech ETFs Pause at Last

ETFZone

Technology has led the rebound in stocks for several years now, so it should be little surprise that it is finally slowing down. This is a sensible time to pare back overweight positions on technology ETFs. Still, fundamentals remain strong.Compared to other industry sectors, technology is less dependent on debt financing and therefore less affected by current tight lending. This sector exports heavily and has diversified revenue streams. No company today can afford to be without up-to-date systems, and consumers are ravenous for next-generation communication devices. US companies lead in many areas of final assembly and sales where the profits are. For ETFs, technology includes computer hardware and software, networking, and sometimes telecom.Valuations for tech ETFs remain reasonable at modest Price/Earnings multiples of 15 to 17. While some analysts say technology is a maturing industry, there are signs of rebirth in smartphones and tablets.During the 2009/2010 rebound, technology ETFs pulled away from the overall market and kept its lead through February 2011:

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Broad-based technology ETFs in the above graph include:
  • SPDR Technology Select Sector ETF (AMEX:XLK - News); 0.24% annual fees
  • iShares Dow Jones US Technology Sector ETF (NYSEArca:IYW - News); 0.48%
  • SPDR Morgan Stanley Technology ETF (AMEX:MTK - News); 0.5%
  • Vanguard Information Technology ETF (AMEX:VGT - News); 0.25%
  • NASDAQ 100 Tracking ETF (NasdaqGM: QQQ - News); 0.20%
But as we suspected last year, technology has started to give up its lead in 2011:

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QQQ is the outlier ETF. What propels it? In a word, Apple. QQQ contains almost 21% Apple, which has performed well for years and especially well after September 2010 due to strong iPhone and iPad sales. This allowed QQQ to outpace major tech indexes by 25% or so in just six months. History suggests it will not repeat this feat. While its non-tech exposure (NASDAQ is a broad index) makes it unsuitable for accurate asset allocation, QQQ has deep liquidity and attractive fees.For pure technology, First Trust NASDAQ-100-Tech Index (NasdaqGM:QTEC - News) filters out non-technology firms from the NASDAQ, but this comes at a steep 0.60% expense ratio and still leaves out non-NASDAQ tech firms. This is an ETF confused as to its purpose.Technology sub-index ETFs include First Trust Dow Jones Internet ETF (AMEX:FDN - News) at 0.60% fees and SPDR S&P Semiconductor ETF (AMEX:XSD - News), which is fairly priced at 0.35% per year. These volatile sub-sectors offer significant upside but require a close watch.In addition to plain-vanilla ETFs, Invesco PowerShares has a line of ETFs using fundamental financial ratios designed to beat cap-weighted tech indexes and sub-indexes:
  • PowerShares Dynamic Technology Sector Portfolio ETF (NYSEArca: PTF - News); 0.60% annual fees
  • PowerShares Dynamic Semiconductors Portfolio ETF (NYSEArca: PSI - News); 0.60%
  • PowerShares Dynamic Software Portfolio ETF (NYSEArca: PSJ - News); 0.60%
  • PowerShares NASDAQ Internet Portfolio ETF (NasdaqGM: PNQI - News); 0.60%
  • PowerShares Dynamic Networking Portfolio ETF (NYSEArca: PXQ - News); 0.60%
A transparent alternative weighting scheme is found in Rydex S&P Equal Weight Technology ETF (AMEX: RYT - News) at 0.50% fees.Going abroad, there is WisdomTree International Technology Sector ETF (NYSEArca: DBT - News) at 0.58% fees, and iShares S&P Global Technology Sector ETF (NYSEArca: IXN - News) at 0.48%.For speculative traders, the following ETFs leverage technology indexes either up or down:
  • ProShares Ultra Semiconductors ETF (AMEX: USD - News); 0.95%
  • ProShares Ultra Technology ETF (AMEX: ROM - News); 0.95%
  • ProShares UltraShort Semiconductors ETF (NYSEArca: SSG - News); 0.95%
  • ProShares UltraShort Technology ETF (NYSEArca: REW - News); 0.95%
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.

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