U.S. Markets open in 18 mins.

Another Tech ETF Showdown


Broadly speaking, the technology sector has performed well this year. Quite well, actually, with a  year-to-date gain of 47% as of Nov. 1, but the issue faced by some large technology exchange traded funds is significant allocations to the sector ‘s dogs.

That roster includes under-performing Apple (AAPL) and Dow component International Business Machines (IBM).  Heading into Friday, shares of Apple were down almost 6.7% since the start of the year while IBM was lower by more than 8%. The S&P 500 (^GSPC) was up nearly 20%. [Usual Suspects Haven't Helped Tech ETFs Much]

Slack performances by some of the most venerable and largest tech names have not derailed big tech ETFs. At least not too much.  The Vanguard Information Technology ETF (VGT) is up nearly 21% this year and VGT, along with rivals such as the Technology Select Sector SPDR (XLK) , are positioned to benefit from the proliferation of mobile and cloud computing. [Slideshow: Major Sector ETFs]

“VGT has a very high-quality portfolio–wide-moat and narrow-moat firms account for about 51.5% and 31% of the portfolio, respectively, meaning that Morningstar’s equity analysts believe that more than 82% of VGT’s assets are invested in firms with sustainable competitive advantages,” said Morningstar analyst Robert Goldsborough in a note.

Goldsborough points out that VGK, which has a tiny 0.14% annual expense ratio, “devotes more than 22% of its assets to small- and mid-cap tech companies, while XLK invests just 9% of its assets in small- and mid-cap firms.”

Still, VGT does not offer a substantial buffer from this year’s tech laggards. Apple and IBM combined for 19.1% of the fund’s weight at the end of September. Oracle (ORCL), a stock that is down this year, and Qualcomm (NasdaqGM:QXOM), up just 3.6%, combine for 7.1% of VGT’s weight, according to Vanguard data.

While VGT offers leverage to a rebound in tech laggards, there is no guarantee such a rebound will materialize. Additionally, investors can consider different spins on the tech sector that sharply outpaced VGT this year.

For example, the Guggenheim S&P 500 Equal-Weight Technology ETF (RYT) is up 29.2% year-to-date, indicating that the 130 basis points in added volatility over VGT that investors take on with RYT is worth the “risk.”

The PowerShares Dynamic Technology Sector Portfolio (PTF) weighs its 60 components by factors such as price momentum, earnings momentum, quality, management action, and value. That recipe has worked to the tune of an almost 34% gain this year. Apple, IBM and Oracle do not reside in PTF.

Vanguard Information Technology ETF

Tom Lydon’s clients own shares of Apple.