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  Saturday, December 20, 2014  Home > Money > Finance > Investment > How to Ride the Technology Sector with ETFs
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How to Ride the Technology Sector with ETFs

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Today's stock market is starting to remind me of 1999. Back then, you may recall, the technology sector led the whole market higher. The same thing is happening so far in 2012.

Admittedly, the party didn't end so well back then — and it won't last forever this time, either. Yet I've learned over the years that uptrends can last far longer than most people think.

Now, thanks to ETFs, you have new ways to get quick, broad exposure to the technology sector. Today I'll review some candidates for you.

Technology, Broadly Speaking

Just a few months ago I told you about some new, specialized technology ETFs. Today we will look at the broad-based tech ETFs that try to capture the entire sector.

SPDR Technology Select Sector (XLK) is the largest and oldest technology ETF. It also has the lowest expense ratio at only 0.18 percent.

SPDR knows about technology.
SPDR knows about technology.

The 81 stocks in the XLK portfolio represent the technology and telecommunications components of the S&P 500 Index. That means XLK gives you a bunch of familiar names with high liquidity. It also means XLK doesn't give you any mid-cap or small-cap technology exposure. And the inclusion of telecom stocks means it is not a "pure play" tech ETF.

iShares Dow Jones U.S. Technology Sector Index Fund (IYW) is another big tech ETF. In most ways it is similar to XLK, but there are two big differences ...

First, IYW has a sharply higher expense ratio of 0.47 percent. That might be all right if the fund offered something distinctive, but it really doesn't.

Second, IYW is highly concentrated. Almost 70 percent of the portfolio is in the ten largest holdings. About 20 percent is in Apple (AAPL) alone. IYW is simply tracking an index from Dow Jones, of course, but I like to see more diversification.

Diversification is important in sector ETFs.
Diversification is important in sector ETFs.

Rounding out the top tech ETFs is Vanguard Information Technology ETF (VGT). Like XLK and IYW, this one is also tilted toward large-cap technology names but also has about 25 percent of its assets in mid-cap and small-cap stocks. VGT is pure technology — no telecom — and the expense ratio is only 0.19 percent.

With 413 holdings in its portfolio, VGT is probably the broadest U.S. technology ETF. Even so, more than half of the assets are in the ten largest stocks.

All things considered, I think VGT is currently the best tech ETF. The 25 percent in small- and mid-cap tech stocks is important because they often represent the sector's best growth potential.

XLK, IYW, and VGT are by far the largest technology sector ETFs, but they aren't the only choices. Here are three smaller funds with similar objectives to the "big three."

  • iShares S&P North American Technology Sector Index Fund (IGM)

  • First Trust Technology AlphaDEX Fund (FXL)

  • SPDR Morgan Stanley Technology ETF (MTK)

What about the 
Rest of the World?

The technology ETFs we've looked at so far are all based on U.S. sector indexes. This means they don't give you any exposure to technology stocks from other countries.

In some sectors this would be no big deal, but some important technology players come from Asia and Europe. Even the best U.S. technology ETFs leave out well-known companies like Samsung, SAP, Hitachi, and Toshiba.

Fortunately there is a way to get the global tech sector in one ETF.iShares S&P Global Technology Sector Index Fund (IXN) is still predominantly a U.S. fund (about 77 percent) but also has significant involvement in Japan, South Korea, Taiwan, Germany, and elsewhere.

Technology is a global industry.
Technology is a global industry.

You should always be careful when trading international and global ETFs. Liquidity can be a real problem, which is one of the reasons I track them so closely for my International ETF Trader members. I'm glad to see IXN is improving on this score. The bid-ask spreads and trading volume are generally good.

Will technology ETFs keep going higher as 2012 unfolds? The best I can say right now is that the group has very bullish momentum. No uptrend lasts forever, though.

I'm especially concerned about the degree to which Apple's amazing performance is pushing the whole sector up. We saw a similar pattern in the last tech mania, back then it was Cisco (CSCO).

With ETFs, you don't have to pin all your hopes on one stock. You have more choices than ever. If you're bullish on technology, you can put them to good use.


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