Three Technology ETFs Delivering Transparency and Cost Efficiency
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During the internet and telecommunications boom of the late 90’s, the concept of investment diversification in this area was nothing more than holding seven or more high technology funds. Concurrently exchange-traded funds were new and the concept of portfolio transparency was not in vogue. After the bursting of the bubble, then all of a sudden investors wanted to know more about the holdings of mutual funds. It became evident that the idea of seven high tech funds was not a diversifier at all.
Attention was directed to ETFs as the next best method to invest in high tech stocks and with the knowledge of knowing exactly what is in the portfolio and how it relates to the underlying index base used to track its performance. The number of competing technology ETFs is large and the following are three to consider and compare. Each has its own uniqueness that separates it from its peers.
The Technology Select Sector SPDR Fund (NYSEMKT: XLK) is a well established ETF and was brought to the market on December 16, 1998. Go to http://www.bloomberg.com/quote/XLK:US for the latest summary. XLK has 81 stocks in its portfolio. Apple Inc (NASDAQ: AAPL) represents 20.47% of the fund and International Business Machine (NYSE: IBM) has 7.68% of the fund. XLKs performance is tied to these two stocks alone. I do like XLK as its post internet-telecommunications bubble performance has done well. I remain concerned on the close to 30% concentration to two stocks. As a momentum strategy, watching these two stocks will give an indication when to get out of XLK. More information can be found at https://www.spdrs.com/product/fund.seam?ticker=XLK
The Guggenheim S&P 500 Equal Weight Technology ETF (NYSEMKT: RYT) tracks the S&P 500 Equal Weight Technology Index and was started on November 7, 2006. Up to date details on RYT are on http://www.bloomberg.com/quote/RYT:US RYT holds 71 stocks in the fund and uses an equal weighting method to determine how much capital to invest in each issue. The largest position in RYT is First Solar Inc. (NASDAQ: FSLR), with 2.26 of the net assets in this position and the next holding in line is Western Digital Corp (NASDAQ: WDC) with 1.71% here. I like the more rounded diversification style of RYT and this has served well during market down turns. RYT has yet to prove itself during severe market corrections, especially those that hit the technology sector hardest. The website to RYT is http://www.rydex-sgi.com/products/etfs/performance/etfperformance.rails?rydex_symbol=ryt
The PowerShares Lux Nanotech Portfolio (NYSEMKT: PXN) follows the Lux Nanotech Index, which is modified market cap index. PXN started on October 26, 2005 and appears to have been on a downslide ever since. Current details are on http://www.bloomberg.com/quote/PXN:US PXN has 26 holdings and the top two positions are Nanosphere (NASDAQ: NSPH), with 7.76% and Headwaters Inc (NYSE: HW), with 7.48%. I simply do not like PXN. This ETF has been on a long-term decline and the unique nature of nanotechnology makes this a tricky portfolio to monitor. Here is a link to the pages of data on PXN http://www.invescopowershares.com/products/overview.aspx?ticker=PXN
Technology ETFs come in a variety of strategies. The indexes that are designed can be a momentum based strategy that gives the bulk of the capital to the top performers, an equal weighted approach which will reduce upside potential and presumably downside risk, and indexes based on narrow segments which may too complex for the average investor. Regardless of the sector of any ETF, the index is both the guide and the benchmark. Properly constructed indexes will have the best opportunity to endure the toss and tumble of market gyrations, especially those found in technology.
Jeffrey L. (Jeff) Stouffer is an Investment Advisor Representative and manages the Alexandria VA office of Kingsview Asset Management. As a practicing financial advisor serving the needs of individuals and small businesses, he believes in using a wide range of investment strategies, including alternative investments. All strategies are client centric and unique. He can be reached at jeff.stouffer@kingsviewassetmanagement.com and is available to answer any questions about this combined approach.
jlstouffer has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
