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What qualifies as a tech company, anyway?

·Michael Santoli

The biggest technology-stock fund holds no Amazon.com (AMZN) shares, but does own Western Union Co. (WU), the 164-year-old money-transfer company.

You’ll find no Netflix Inc. (NFLX) in there. Yet the portfolio features full exposure to the video-game sector, through both Electronic Arts Inc. (EA) and Activision Blizzard Inc. (ATVI).

Even though this fund – the $11 billion Technology Select SPDR ETF (XLK) – lacks Amazon, it’s got e-commerce peer eBay Inc. (EBAY), not to mention telecom giants that date to the rotary-dial era, AT&T Inc. (T) and Verizon Communications Inc. (VZ).

These apparent contradictions show how blurred the definition of a tech company has become in a time when nearly all businesses define themselves as one and software and digital communication are at the core of modern economies.

The XLK fund simply tracks the members of the Standard & Poor’s 500 Index that are classified by S&P Dow Jones Indices as tech and telecom companies. Decades ago, a tech company pretty much meant one that made computers, computing equipment and software. But now the designation is more a judgment call.

The discussion over what makes a tech company would be purely academic if not for the way investors increasingly use sector funds to play discrete pockets of the stock market.

Along with Western Union and the video-game publishers, the XLK has an 8% allocation in payment processors. These include the card-network giants Visa Inc. (V) and Mastercard International (MA) as well as PayPal Holdings Inc. (PYPL) – just spun off from eBay – and some other back-office transaction processors.

AT&T and Verizon together make up another 9% of the fund, perhaps an oddly stout representation by consumer-services stocks often bought purely for their hefty dividends rather than as drivers of innovation.

One could even quibble that big XLK holdings Google Inc. (GOOGL, GOOG), Facebook Inc. (FB) and Yahoo Finance’s parent Yahoo Inc. (YHOO) are, strictly speaking, media companies in the business of connecting advertisers with eyeballs same as, say, CBS Inc. (CBS).

While gung-ho tech investors might find too much of the Old Economy in the XLK fund, others looking simply to bet on the American household spending through the Consumer Discretionary Select SPDR (XLY) are liable to be surprised at its exposure to fast-moving cyber stocks.

Amazon, Netflix and Priceline Group Inc. (PCLN) together make up nearly one-seventh of that consumer-discretionary fund.

Yet these stocks are commonly viewed and treated as tech stocks. A separate big tech-stock ETF, the SPDR Morgan Stanley Technology fund (MTK), has Netflix and Amazon as its top two holdings. And, generally, the Wall Street analysts who follow Amazon cover other Internet companies, not traditional retailers. Part of the issue is that some companies don't fit neatly anywhere but tech. What else to do with Visa, for instance? It's not really a financial or consumer company.

Other priorities are at work, too, though. Reports at the time Amazon was first added to the S&P 500 in 2005 suggested that the index committee placed it in consumer discretionary because that sector was then under-represented in the benchmark. This underscores the porous walls separating index sectors, which don’t always follow the popular know-it-when-I-see-it definition of tech.

Just to complicate things further, Amazon does not share space in the consumer discretionary bucket with some of the broad-line retailers that are typically viewed as its key competitors for consumer dollars.

S&P places Wal-Mart Stores Inc. (WMT) and Costco Wholesale Inc. (COST) in consumer staples, presumably on the logic that they sell mostly everyday items insulated from swings in consumer incomes and tastes.

These slippery definitions of what qualifies as technology, or innovation, have been present, to some degree, in every economic era. Telegraphs and tractors once defined the cutting edge, and railroads were the 19th century’s version of rapid commerce.

Of course, tech investors today do well to look across the industry frontiers for companies doing something new that could upend an industry.

As Cathie Wood of ARK Invest notes in the attached video, Tesla Motors Inc. (TSLA) is fairly viewed as a tech company more than a typical automaker. And her firm’s industrial innovation investment theme highlights benefits from commercial-drone development to the likes of Monsanto Co. (MON) and United Parcel Service Inc. (UPS).

Don’t tell the index providers, but there might come a time when the label “technology” becomes so broadly applicable that it becomes pretty much irrelevant.