Five Tech ETFs to Look at Now

By: Ron_Rowland

You can always count on one thing in the technology sector: Change! The cutting-edge inventions that fascinated us so much back in the 1990s are de rigueur now. Where will we be in ten years? I can only imagine.

As I said last year in my Trade Technology with ETFs column, playing tech trends with individual stocks is a high-risk game. You never know where the next big breakthrough will originate. Even a portfolio of 15-20 tech stocks might not catch the big winners.

The ideal solution: Exchange traded funds (ETFs). But you still have to know what you are buying. These days, the answer is not as easy as it might look.

Here’s the problem: “Technology” is a very broad term. You can take your pick of tech-oriented ETFs and mutual funds. The big ones will be composed of the same few dozen names — highly liquid stocks that won’t get anyone in trouble.

With the plain-vanilla segment well covered, ETF sponsors are defining narrower and narrower niches in an attempt to distinguish their offerings. Unfortunately, the “definitions” are not always as clear as they might seem.

Here is a good example …

Where Does GOOG fit in?

What is Google? Does GOOG fit into the internet, software, or telecom category? Maybe it should be classified as an advertising company instead of a tech company.

Pop quiz: What sector is this company?

The correct answer: All of the above! Google is a big company doing many different things. Ditto for stocks like Apple, IBM, and Microsoft.

This creates a quandary …

Index providers categorize stocks in various ways; so not all “software” ETFs are comparable to each other. The same is true in any of the technology sub-sectors.

So what do you do? Many analysts take a top-down approach. They look at market action to identify promising trends, then try to find ETFs that can exploit those trends.

I prefer to work from the bottom up, going straight to the performance of individual ETFs. I don’t especially care what they claim to be doing. I look at what they are doing — and the results always show up in their performance.

Of course I consider other factors like liquidity and diversification, and you should, too. You also need a strategy that dispassionately ranks the available ETFs from best to worst.

Right now my analysis is pointing to a handful of technology ETFs with strong momentum. You may want to take a closer look at these names …

• First Trust Dow Jones Internet (FDN). We’re way past the days when “the Internet” was new and exciting. Now it’s just a part of life. Yet there is still money to be made on the net — and companies like Google, Amazon, eBay, and Yahoo! are doing it. That’s why their stocks are climbing recently. FDN is a good way to get on the train.
• Guggenheim China Technology (CQQQ). It’s no exaggeration to say our high-tech society could not exist without China. Many of the devices we depend on so heavily originate there. CQQQ lets you zero in on Chinese tech stocks. Incidentally, this ETF used to be called Claymore China Technology. The sponsor was bought by Guggenheim recently, and they are changing names.
• iShares S&P North American Technology — Software (IGV). A computer without software is like a brick without a building: Not worth much. IGV holds a good selection of the software-oriented stocks that keep the world going.
• Vanguard Telecommunication Services (VOX). Phone companies used to be boring — and they still would be if all they did was let us call each other and chitchat. Now they do much more: Data is their fastest-growing segment, especially mobile data. The stocks held in VOX are literally the glue that binds the world’s technology together.
• PowerShares Dynamic Networking (PXQ). Technology took a quantum leap when computers starting talking to each other as well as to us. The stocks held by PXQ are involved in both hardware and software, with a singular focus on networking. I especially like the way this ETF diversifies its holdings.

So what is the potential with ETFs like these? Just check out their results for the current quarter on the table to the left.

Meanwhile, another technology group, semiconductors, has been lagging the past few months. So if your favorite tech fund has a large allocation to this group, then chances are it’s been lagging too.

Obviously we don’t know that the next three months will be as favorable as the last, for these ETFs or any others. Yet if your goal is to follow the bull wherever he goes, they could be some good candidates for you to consider.

Best wishes,

Ron

P.S. Are you on Twitter? If so, please follow me at http://www.twitter.com/ron_rowland for frequent updates, personal insights and observations about the world of ETFs.

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