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Barchart.com ETF ResearchBarchart.com's Picks for the Information Technology Sector ETF Research written by the Barchart.com ETF Research Team Last Updated: May 8, 2011 Table of Contents
IntroductionInformation Technology, also referred to as just Technology, is a rather broad term that covers many different industries. The best way to define the sector is with Standard and Poors' "Global Industry Classification Standard® (GICS®)," which is the most widely used standard for separating stocks into industry sectors. The GICS system classifies all stocks using a four-level system that starts with a "Sector" level, such as Information Technology. The Information Technology sector is then broken down into three Industry Groups: (1) "Software and Services" companies that provide intangible products such as software and services, (2) "Technology Hardware and Equipment" companies that produce physical hardware such as computers and electronics, and (3) "Semiconductors and Semiconductor Equipment" companies that are involved in producing the semiconductor chips that are used in computers and electronic devices. These three Industry Groups are then further divided into the following Industry categories: Software & Services
Technology Hardware & Equipment
Semiconductors & Semiconductor Equipment
For this report, however, we will divide the Information Technology sector into eight different groups in order to pick the best ETF in each group. This allows investors to obtain the exact Technology exposure they want. Our groups are as follows:
Broad U.S Technology SectorTechnology Select Sector SPDR Fund (XLK) (issuer web site link) – This fund, launched in December 1998, has $7.5 billion in assets under management. The fund has an expense fee of 0.20%. The fund tracks the Technology Select Sector Index. The fund holds 83 U.S.-listed stocks. The five top holdings are: Apple (12.0%), Microsoft (8.1%), IBM (7.5%), AT&T (6.9%), and Google (5.8%). Vanguard Information Technology Index Fund (VGT) (issuer web site link) – This fund, launched in January 2004 has $1.9 billion in assets under management. The fund has an expense fee of 0.24%. The fund tracks the MSCI US Investable Market Information Technology 25/50 Index. The fund holds 420 U.S.- listed stocks. The five top holdings are: Apple (11.2%), Microsoft (8.3%), IBM (7.0%), Google (5.6%), and Oracle (4.8%). First Trust NASDAQ-100 Technology Sector Index Fund (QTEC) (issuer web site link) – This fund, launched in April 2006, has $630 million in assets under management. The fund has a net expense fee of 0.60%. The fund tracks the NASDAQ-100 Technology Sector Index and is an equal-weighted index. The fund holds 40 U.S.- listed stocks. The five top holdings are: Seagate (2.9%), Baidu (2.8%), Infosys Technologies (2.7%), Citrix Systems (2.7%), and Oracle (2.6%). iShares S&P GSTI Technology Index Fund (IGM) (issuer web site link) – This fund, launched in March 2001, has $460 million in assets under management. The fund has a net expense fee of 0.48%. The fund tracks the S&P North American Technology Sector Index. The fund holds 259 U.S.- listed stocks. The five top holdings are: Apple (8.7%), INTL (7.6%), Microsoft (7.2%), Google (5.5%), and Oracle (4.9%). SPDR Morgan Stanley Technology ETF (MTK) (issuer web site link) – This fund, launched in September 2000, has $220 million in assets under management. The fund has a net expense fee of 0.25%. The fund tracks the equal-weighted Morgan Stanley Technology Index. The fund holds 36 U.S.- listed stocks. The five top holdings are: Salesforce.com (5.6%), Apple (4.1%), NetApp (3.9%), Intuit (3.8%), and Broadcom (3.6%). First Trust Technology AlphaDEX Fund (FXL) (issuer web site link) – This fund, launched in May 2007, has $210 million in assets under management. The fund has a net expense fee of 0.70%. The fund tracks the StrataQuant Technology Index, which is an "enhanced" index that employs the AlphaDEX ® stock selection methodology to select stocks based on various value factors including book value to price, cash flow to price and return on assets. The fund holds 86 U.S.- listed stocks. The five top holdings are: Seagate Technology (2.5%), Western Digital (2.1%), Novell (2.1%), Computer Science Corp (2.0%), and AVX (2.0%). Rydex S&P Equal Weight Technology ETF (RYT) (issuer web site link) – This fund, launched in November 2006, has $140 million in assets under management. The fund has a net expense fee of 0.50%. The fund tracks the S&P 500 Equal Weight Index Information Technology. The fund holds 75 U.S.- listed stocks. The five top holdings are: National Semiconductor (2.2%), Red Hat (1.5%), Western Digital (1.5%), Oracle (1.4%), and Autodesk (1.4%). PowerShares Dynamic Technology Sector Portfolio (PTF) (issuer web site link) – This fund, launched in October 2006, has $49 million in assets under management. The fund has a net expense fee of 0.65%. The fund tracks the Dynamic Technology Sector Intellidex Index. The fund holds 60 U.S.- listed stocks. The five top holdings are: Xilinx (2.7%), Xerox (2.7%), Western Union (2.7%), SanDisk (2.6%), and Amphenol (2.6%). Figure 1: Comparison of Technology Select Sector SPDR Fund (XLK), Vanguard Information Technology Index Fund (VGT), and iShares Dow Jones U.S. Technology Sector Index Fund (IYW) (live chart link)
Our broad U.S. technology pick - Our pick in this group is the Technology Select Sector SPDR Fund (XLK) due to its much larger size than its competitors and the fact that it has the lowest expense fee of 0.20% compared with its largest competitors. Figure 1 illustrates that XLK has slightly underperformed its two largest competitors over the past 5 years, but this underperformance is relatively minor and there is no real reason for it to persist in the future. However, we do have a caveat with XLK due to its inclusion of what are typically thought of as telecom stocks (AT&T, Verizon, and Sprint) and financial services companies (Master Card and Visa), which in our view dilutes its value as a pure Technology play. We are therefore naming Vanguard Information Technology Index Fund (VGT) as a close runner-up to XLK. VGT's expense fee of 0.24% is just slightly higher than XLK's 0.20% but VGT is closer to a pure technology play and has slightly outperformed XLK over the past 5 years. Clients of Vanguard should check whether they can get free brokerage commissions for buying and selling VGT, which of course would make VGT more attractive to Vanguard clients. Leveraged Long Broad Technology ETFsDirexion Technology Bull 3x Shares (TYH) (issuer web site link) – This fund, launched in December 2008, has $210 million in assets under management. The fund has a net expense fee of 0.98%. The fund seeks daily investment results, before fees and expenses, of three times the price performance of the Russell 1000 Technology Index, which is an index of 81 U.S.- listed stocks. The five top holdings are: Apple, IBM, Microsoft, Oracle, and Google. ProShares Ultra Technology (2X) (ROM) (issuer web site link) – This fund, launched in January 2007, has $130 million in assets under management. The fund has a net expense fee of 0.95%. The fund seeks to obtain twice the daily performance of the Dow Jones U.S. Technology Index, which is an index of 85 U.S.- listed stocks. The five top holdings are Apple, IBM, Microsoft, Oracle and Google. These two funds are fairly similar. The choice for an investor basically comes down to whether he or she is looking for 3X leverage or 2X leverage.Short Broad Technology ETFsDirexion Daily Technology Bear -3X Shares (TYP) (issuer web site link) – This fund, launched in November 2006, has $42 million in assets under management. This fund has a net expense fee of 1.14%. The fund is the short version of the Direxion Daily Technology Bull 3X Shares (TYH). This fund seeks daily investment results, before fees and expenses, of three times the inverse (or opposite) of the price performance of the Russell 1000 ® Technology Index. This fund is therefore not only a short fund, but is also a leveraged fund. ProShares UltraShort Technology (-2X) (REW) (issuer web site link) – This fund, launched in January 2007, has only $18 million in assets under management. The fund has a net expense fee of 0.95%. This fund seeks daily investment results, before fees and expenses, which correspond to twice the inverse (opposite) of the daily performance of the Dow Jones U.S. Technology Index. This is the companion short fund to the ProShares Ultra 2X Technology fund (ROM). These two short technology ETFs are below our suggested minimum asset size of $50 million, which means that we would advise investors to avoid these products for longer-term investment purposes. For short-term trading purposes, however, the Direxion Daily Technology Bear -3X Shares (TYP) fits the bill as a means for traders to get both short and leveraged exposure to the Technology sector.U.S SoftwareiShares S&P GSTI Software Index Fund (IGV) (issuer web site link) – This fund, launched in July 2001, has $590 million in assets under management. The fund has a net expense fee of 0.48%. The fund tracks the S&P North American Technology-Software Index. The fund holds 53 U.S.- listed stocks. The five top holdings are: Oracle (9.5%), Microsoft (7.5%), Adobe Systems (6.8%), Salesforce.com (6.2%), and Intuit (5.9%). PowerShares Dynamic Software Portfolio (PSJ) (issuer web site link) – This fund, launched in June 2005, has $76 million in assets under management. The fund has a net expense fee of 0.63%. The fund tracks the Dynamic Software Intellidex. The fund holds 30 U.S.- listed stocks. The five top holdings are: Oracle (5.4%), Teradata (5.3%), Fiserv (5.0%), BMC Software (5.0%), and Dolby Laboratories (4.9%). Figure 2: Comparison of iShares S&P GSTI Software Index Fund (IGV) and PowerShares Dynamic Software Portfolio (PSJ) (live chart link)
There is clearly a case to be made for investing in the software area of the IT field. Software companies can have high profit margins given that they do not need to build and operate huge, high-tech factories to produce computer and electronic products. The largest U.S. software companies focus on different areas such as operating systems, databases, security, productivity suites, and many others. One trend that bears watching in the software sector is the "software as a service" concept. Rather than the traditional idea of installing software on your local desktop or laptop PC, companies such as Salesforce.com run their software on server banks in the so-called "cloud" and then customers simply interface to the service through the web. This blurs the difference between software and web-based services, but the result for the customer turns out to be the same. In this software sector, our pick is the "iShares S&P GSTI Software Index Fund (IGV). This fund has over $500 million in assets and provides market-cap based exposure to the top U.S. software providers. The fund has also recently outperformed its main competition, as seen in Figure 2. We would avoid the PowerShares Dynamic Software Portfolio (PSJ) mainly because of its small size and the unpredictability of use of the Intellidex system for running the index. U.S. SemiconductorsSPDR S&P Semiconductor ETF (XSD) (issuer web site link) – This fund, launched in January 2006, has $140 million in assets under management. The fund has a net expense fee of 0.35%. The fund tracks the S&P Semiconductor Select Industry Index, which is an equally-weighted index. The fund holds 53 U.S.-listed stocks. In an equally-weighted fund, the top holdings will be the stocks that have rallied the most since the last rebalancing. Well-known semiconductor stocks in the index include Intel (2.16%), Texas Instruments (1.94%), Advanced Micro Devices (1.95%), and National Semiconductor (3.14%). Notably, this fund also includes solar stocks such as First Solar (FSLR) and SunPower (SPWRA) since solar cells involve semiconductor technology. However, the inclusion of solar companies moves this fund slightly away from what most investors would think of as semiconductor technology involving the computer and electronic device markets. PowerShares Dynamic Semiconductors Portfolio (PSI) (issuer web site link) – This fund, launched in June 2005, has $48 million in assets under management. The fund has a net expense fee of 0.63%. The fund tracks the Dynamic Semiconductors Intellidex. The fund holds 30 U.S.- listed stocks. The five top holdings are: Xilinx (5.7%), KLA-Tencor (5.6%), Applied Materials (5.6%), QUALCOMM (5.3%), and Altera (5.0%). In the semiconductor sector, the only real choice is the SPDR S&P Semiconductor ETF (XSD) since its competitor, the PowerShares Dynamic Semiconductors Portfolio (PSI), has an asset level that is too low in our view for a recommendation. Investors should recognize that the SPDR S&P Semiconductor ETF is based on an equally-weighted index, which puts an equal emphasis on all the stocks in the sector and therefore increases exposure to small-cap stocks as compared with a market-cap index. Leveraged Semiconductor ETFsDirexion Daily Semiconductor Bull 3X Shares (SOXL) (issuer web site link) – This fund, launched in March 2010, has $110 million in assets under management. The fund has a net expense fee of 0.95%. The fund seeks to obtain three times the price performance of the PHLX Semiconductor Sector Index excluding fees and expenses. The fund holds 82 U.S.- listed stocks. The five top holdings are: Intel (9.1%), Texas Instruments (TXN), Applied Materials (7.6%), Broadcom (6.8%), and Taiwan Semiconductor Manufacturing (6.5%). ProShares Ultra Semiconductors (USD) (issuer web site link) – This fund, launched in January 2007, has $66 million in assets under management. The fund has a net expense fee of 0.95%. The fund seeks to obtain twice the daily performance of the Dow Jones U.S. Semiconductors Index excluding fees and expenses. The fund holds 51 U.S.- listed stocks. The five top index holdings are: Intel (28.3%), Texas Instruments (10.4%), Applied Materials (5.3%), Broadcom (4.9%), and Altera (3.6%). In this category, our pick is the Direxion Daily Semiconductor Bull 3X Shares (SOXL) based mainly on the fact that it has over $100 million in assets under management. The ProShares Ultra Semiconductors ETF (USD), by contrast, has only $66 million in shares. We also like the fact that the weights are spread more evenly in SOXL. In SOXL, for example, Intel has a 9.1% weight whereas in USD Intel has a very high weight of 28.3% where it dominates the index.Short Semiconductor ETFsDirexion Daily Semiconductor Bear 3X Shares (SOXS) (issuer web site link) – This fund, launched in March 2010, has $21 million in assets under management. The fund has a net expense fee of 0.95%. The fund seeks to obtain three times the inverse of the PHLX Semiconductor Sector Index excluding fees and expenses. This is the companion short fund to the Direxion Daily Semiconductor Bull 3X Shares (SOXL) described above. ProShares UltraShort Semiconductors (-2X) (SSG) (issuer web site link) – This fund, launched in January 2007, has $25 million in assets under management. The fund has a net expense fee of 0.95%. The fund seeks to obtain twice the inverse of the daily performance of the Dow Jones U.S. Semiconductor Index excluding fees and expenses. This is the short companion fund to the ProShares Ultra Semiconductors (USD) described above. These two short semiconductor ETFs have minimal assets and we recommend that investors stay away from these products unless they are simply looking for a short-term trading vehicle.U.S. NetworkingiShares S&P North American Technology-Multimedia Networking Index Fund (IGN) (issuer web site link) – This fund, launched in July 2001, has $270 million in assets under management. The fund has a net expense fee of 0.48%. The fund tracks the S&P North American Technology-Multimedia Networking Index. The fund holds 35 U.S.-listed stocks. The five top holdings are: Qualcomm (9.5%), Juniper Networks (9.2%), Research In Motion (7.1%), Cisco (6.9%), and Motorola (6.1%). PowerShares Dynamic Networking Portfolio (PXQ) (issuer web site link) – This fund, launched in June 2005, has $170 million in assets under management. The fund has a net expense fee of 0.63%. The fund tracks the Dynamic Networking Intellidex index. The fund holds 30 U.S.- listed stocks. The five top holdings are: Riverbed Technology (7.3%), Juniper Networks (5.6%), Qualcomm (5.4%), Broadcom (5.3%), and Amphenol (4.9%). These two ETFs were launched a relatively long time ago in 2001 and 2005, respectively, when the global information technology sector had yet to be fully defined. We question the investment case for a vehicle that is so narrowly focused on the networking sector by itself as compared with the larger opportunities available in the IT space. Nevertheless, our pick in this sector is the iShares S&P GSTI Networking Index Fund (IGN) based on its higher assets under management and its lower expense fee. U.S. InternetFirst Trust Dow Jones Internet Index Fund (FDN) (issuer web site link) – This fund, launched in June 2006, has $760 million in assets under management. The fund has a net expense fee of 0.60%. The fund tracks the Dow Jones Internet Index. The fund holds 41 U.S.- listed stocks. The five top holdings are: Google (8.5%), Amazon (7.6%), eBay (5.6%), Priceline.com (5.4%), and Yahoo (4.5%). PowerShares NASDAQ Internet Portfolio (PNQI) (issuer web site link) – This fund, launched in June 2008, has $48 million in assets under management. The fund has a net expense fee of 0.60%. The fund tracks the NASDAQ Internet Index. The fund holds 68 U.S.- listed stocks. The five top holdings are: Baidu.com (8.8%), Priceline.com (8.6%), Amazon (7.7%), eBay (6.9%), and Google (6.1%). Our pick in this sector is the First Trust Dow Jones Internet Index Fund (FDN), which has a substantial amount of assets under management, as compared with the minimal assets in the PowerShares NASDAQ Internet Portfolio (PNQ). In PNQ, we also question the wisdom of an index methodology that gives a category-creator such as Google, with a market cap of over $150 billion, a lower weighting than a stock such as Priceline, which has a much smaller market cap of $25 billion.Global TechnologyiShares S&P Global Technology Sector Index Fund (IXN) (issuer web site link) – This fund, launched in November 2001, has $620 million in assets under management. The fund has a net expense fee of 0.48%. The fund tracks the S&P 500 Global Information Technology Sector Index, which is a subset of the S&P Global 1200 Index. The fund holds 118 globally listed stocks. The five top holdings are: Apple (10.8%), IBM (6.9%), Microsoft (6.3%), Oracle (4.5%), and Google (4.4%). SPDR S&P International Technology Sector ETF (IPK) (issuer web site link) – This fund, launched in July 2008, has $27 million in assets under management. The fund has a net expense fee of 0.50%. The fund tracks the S&P Developed Ex-U.S. BMI Information Technology Sector Index. The fund holds 101 globally-listed stocks. The five top holdings are: Samsung (14.7%), Canon (5.5%), Nokia (5.4%), SAP (4.5%), and Research In Motion (3.7%). iShares MSCI ACWI ex-U.S. Information Technology Sector Index Fund (AXIT) (issuer web site link) – This fund, launched in July 2010, has $6 million in assets under management. The fund has a net expense fee of 0.48%. The fund tracks the MSCI All Country World ex USA Information Technology Index. The fund holds 84 U.S.- listed stocks. The five top holdings are: Samsung (10.9%), Taiwan Semiconductor (7.5%), SAP (5.0%), Canon (4.7%), and Hon Hai Precision (4.5%). We generally like to recommend globally-listed ETFs, rather than ETFs that only have U.S.-listed stocks, because investors are typically far too light on their global equity exposure compared with the ideal levels shown by academic studies. In addition, with the process of globalization and the big opportunities in overseas markets, we think it is provincial to stick to U.S.-listed companies. With the possibility of long-term weakness in the dollar, ETFs with overseas exposure make even more sense. ETFs are an ideal way to get overseas equity exposure because all U.S.-listed ETFs trade in terms of dollars, which keeps things simple in one's brokerage account. The ETF fund takes care of all the underlying currency problems of buying and selling stocks listed overseas. Having noted our preference for global technology stocks, however, we must point out that IXN is still dominated by U.S. technology names. Of the top 20 stocks in the fund, only 5 stocks are listed outside the U.S, i.e., Samsung (4.1%), SAP (1.9%), Canon (1.8%), Ericsson (1.5%), and Hon Hai (1.3%). In the top 20 stocks held by the fund, the 15 U.S.-listed stocks carry a combined weight of 54.5% whereas the 5 non-U.S. stocks in the top 20 stocks carry a combined weight of only 11.7%. In the event that an investor believes IXN does not carry enough weight on non-U.S. technology stocks, that investor could get a heavier non-U.S. exposure by simply buying a portfolio of selected European and Asian technology stocks to boost his or her exposure to non-U.S. technology stocks beyond what IXN offers. Although we like the idea behind the two ex-U.S. technology ETFs listed above, i.e., SPDR S&P International Technology Sector ETF (IPK) and iShares MSCI ACWI ex-U.S. Information Technology Sector Index Fund (AXIT), neither of those funds is large enough at present to earn a recommendation. Figure 3: Comparison of iShares S&P Global Technology Sector Index Fund (IXN) and Technology Select Sector SPDR Fund (XLK) (live chart link)
China TechnologyClaymore China Technology ETF (CQQQ) (issuer web site link) – This fund, launched in December 2009, has $50 million in assets under management. The fund has a net expense fee of 0.70%. The fund tracks the AlphaShares China Technology Index. The fund holds the stocks of 40 China-based companies. The five top holdings are: Baidu.com (12.3%), Sina (12.0%), Tencent Holdings (9.6%), Lenovo (6.0%), and Kingboard Chemical Holdings (5.1%). GLOBAL X China Technology ETF (CHIB) (issuer web site link) – This fund, launched in December 2009, has $5 million in assets under management. The fund has a net expense fee of 0.65%. The fund tracks the S-BOX China Technology Index. The fund holds the stocks of 30 China-based technology companies. The five top holdings are: China Unicom (4.8%), China Mobile (4.7%), Ctrip.com (4.6%), Tencent Holdings (4.6%), and Alibab.com (4.6%). Our pick in the China technology sector is Claymore's China Technology ETF since it has substantially more assets than the Global X fund, which has yet to attract more than its original seed money. However, investors should beware of the Claymore China Technology ETF since it has barely enough assets at this point to guarantee its future. We very much like the investment theme of investing in Chinese technology stocks, but we want to warn investors to keep their investment in this segment relatively small due to the highly speculative nature of Chinese technology stocks and because there are higher risks to investing in funds that hold Chinese stocks as opposed to funds that hold stocks that trade in developed countries.From the Barchart.com ETF Research Team ETP's mentioned: XLK, VGT, IYW, QTEC, IGM, MTK, FXL, RYT, PTF, TYH, ROM, TYP, REW, IGV, PSJ, XSD, PSI, SOXL, USD, SOXS, SSG, IGN, PXQ, FDN, PNQI, IXN, IPK, AXIT, CQQQ, CHIB ________________________Copyright© 2011 Barchart.com, Inc. All rights reserved. 330 South Wells Street, Suite 612, Chicago, Illinois 60606-7110 USA • E-mail: info@barchart.com • Website: www.barchart.com. |
