Tech ETFs to capture market rally

Not all technology funds are the same. Some hold small caps, while others buy abroad.

By TheStreet Staff Nov 1, 2010 10:09AM

By Gregg Greenberg, TheStreet


The PowerShares QQQ Trust (QQQQ), the biggest technology exchange-traded fund, has risen 20% since the end of August, almost twice as much as the broader S&P 500 Index ($INX), powered by an increase in the shares of Apple (AAPL) and Google (GOOG).


But investors in tech ETFs could have gotten bigger gains elsewhere. PowerShares QQQ Trust's underlying index is the Nasdaq-100 of the largest domestic and international non-financial securities listed on the namesake exchange. Rival ETFs, for instance, load up on Internet stocks and Chinese shares. Some tech ETFs trailed the PowerShares QQQ Trust, which has more than $20 billion in assets.


TheStreet explored technology ETF alternatives with the help of experts Tom Lydon, editor of ETF Trends, and Christian Magoon, CEO of Magoon Capital.


iShares Global Technology ETF (IXN)


The iShares S&P Global Technology Sector Index Fund, up 18% since Sept. 1, tracks the technology companies found in the Standard & Poor's Global 1200 Index. It is market-cap weighted and, therefore, prone to sizable bets on the world's biggest companies, with more than half of its assets among its top 10 holdings.

Included in the top 10 are the world's tech heavyweights such as Apple, which makes up 10% of assets, followed by Microsoft (MSFT), IBM (IBM), Google and Cisco (CSCO).


As for its global moniker, that's debatable. The only non-U.S. name in the ETF's top 10 is South Korea's Samsung. Three-quarters of the companies are headquartered in America, followed by Japan, at 9%.


"Technological advances are occurring across the globe so investors need to look worldwide as they build their technology allocation. IXN delivers exposure to more than nine countries touching four different technology sub sectors," Magoon says.


Technology Select Sector SPDR (XLK)


The Technology Select Sector SPDR, up 18% since the start of September, chooses its components according to their market-cap weightings in the S&P 500, so it's a domestic fund. That said, all of its 85 holdings have global reach, starting with Apple at the top (12% of the fund), all the way down to Monster Worldwide (MWW) (at 0.08%).


The fund is a diverse play on the tech sector, covering products developed by Internet software and service companies, IT consulting services, semiconductor equipment and products, computers and peripherals, diversified telecommunication services and wireless telecommunication services.


The fund is about a quarter of the size of the PowerShares QQQ Trust, with $4.3 billion in assets. Nevertheless, it's a favorite of traders with an average volume of 11.4 million shares traded a day.


"XLK gives some of the best exposure to the technology industry with 85 holdings. In one shot, you can get a play on computers, software, networking products, telecom-service providers and more," Lydon says.


Guggenheim China Technology ETF (CQQQ)


The Guggenheim China Technology ETF, formerly the Claymore China Technology Fund, is up 17% since the end of Aug. 31. The ETF is a good choice for investors seeking exposure to China's more than 400 million Internet users, more than the population of the U.S.) And while that seems like a big number, the penetration rate remains low at 32%, compared with 70% in the U.S. The fund, using a low-cost "passive" or "indexing" investment approach, seeks to replicate, before fees and expenses, the performance of the AlphaShares China Technology Index.


So what's in the fund? A lot of Internet firms: Baidu (BIDU) and Tencent Holdings, which make up a quarter of the ETF's holdings.


Volume on this ETF has been rather meek of late, running at an average of 11,500 shares a day over the past three months. But that could change once more Chinese technology firms emerge.

"As one of the world's largest and fastest-growing economies, China is fertile ground for technology investors seeking to get ahead of the curve. Demographics, standard of living gains, governmental demand and green technology point to a growth story for China tech companies in the years to come. Currently, broad-based technology ETFs do not provide meaningful exposure to Chinese technology companies," Magoon says.


First Trust Equal Weight NASDAQ 100 (QTEC)


The First Trust Equal Weight NASDAQ 100 ETF, up 23% since Sept. 1, equally invests in the 100 largest non-financial companies traded on the Nasdaq. By backing out the banks, there's a lot of tech, especially chip companies such as Altera (ALTR) and Broadcom (BRCM). All in all, hardware stocks make up 53% of the portfolio, while software comprises 37% and telecom stocks 10%.


The ETF is slowly catching on with an average volume of 189,000 shares traded per day and assets of $194 million. That could spike, however, if the chip sector bounces back and investors learn to appreciate the merits of an equally weighted index.


"An equal-weight investment approach lessens the impact of one single stock's performance and, thus, is a more diversified approach to investing in a more volatile sector like technology. Over the last two years, QTEC has managed to handily outperform the more well-known Nasdaq ETF, the QQQQ, which isn't equal weighted," Magoon says.


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