3 Technology ETFs to Buy After the Crash

Advertisement

Oppenheimer analyst Ari Wald believes technology stocks are oversold after last week’s slashing and provide good value from now through the end of the summer.

technology-etf-xlk-psct-tdiv

You could cherry-pick individual names. There’s certainly no shortage of them.

The market appears to be coming around to Wald’s way of thinking, with several tech stocks coming up off the mat in a Tuesday rebound.

An easy way to ride the rebound is to own a technology ETF (short for exchange-traded fund) that holds a basket of stocks, many of which should benefit from the uptick Wald expects to happen over the next few months.

But which technology ETF should you own after the crash? Well, you’ve actually got a few options right now:

Technology ETF #1: Technology SPDR (XLK)

technology-etf-xlkGo big or go home: That’d be the motto of the first technology ETF, the Technology SPDR (XLK), which stands alone atop the mountain with a whopping $12.4 billion in total net assets.

But not only is XLK the biggest … it’s also pretty darn cheap with an annual expense ratio of just 0.16%.

Of the 10 largest technology ETFs in terms of total assets, only the Vanguard Information Technology ETF (VGT) is cheaper … and that’s only by 2 basis points.

Sometimes bigger is better.

If you’re looking for a technology ETF with a lot of holdings; this isn’t it. But even though XLK has just 71 holdings — by comparison, VGT has 411 — you’re still getting all the major players in information technology. Apple (AAPL) is the top holding in both funds with a 13.5% weighting for XLK versus 12.4% for VGT. And all told, XLK and VGT’s top 10 holdings account for roughly the same amount of the total portfolio (58% and 54%, respectively). The difference is that while XLK spreads the rest of its portfolio among 61 stocks, the VGT invests in 401 — and that horde of extra companies actually does very little to move the needle.

The VGT has achieved an annualized total return of 20.7% over the past five years, which is 150 basis points higher than XLK. But as you know, past performance isn’t an indicator of future performance. For me, it comes down to focus. Once you’ve assured yourself that a fund’s fees are reasonable, you want to ensure that the holdings do what they’re supposed to which is to sufficiently diversify in a particular industry — in this case, technology — so you benefit from any major sectoral move.

For my money, the XLK does this as well as any technology ETF without throwing in everything but the kitchen sink.

If Wald is right about tech, XLK will do you just fine.

Technology ETF #2: PowerShares S&P SmallCap Information Technology Portfolio (PSCT)

technology-etf-psctThe Technology SPDR’s smallest stock has a market cap of $3.8 billion, and the weighted average market cap of XLK’s holdings is $193 billion, so it’s squarely in the mid- and large-cap camp.

The PowerShares S&P SmallCap Information Technology Portfolio (PSCT) has an average market cap of $1.8 billion, fitting nicely behind the XLK. For those who like a little exposure to smaller companies in their portfolio, this is the technology ETF to get the job done.

Much like the XLK, the PSCT is a relatively focused portfolio (just 123 holdings) tracking a tech subset of the S&P SmallCap 600. PSCT is rebalanced and reconstituted quarterly, and annual turnover is surprisingly low at 17%, meaning it turns the portfolio about once every six years. As a result of the low turnover, it’s able to charge only 0.29% annually, which is reasonable for a sector-based, small-cap ETF.

Unlike the Technology SPDR, PSCT’s holdings aren’t as focused in the top 10, which account for just 21% of its $243 million in total net assets. The top holding is networking product maker Belden (BDC) with a weighting of 2.51%. The bottom holding — semiconductor solutions provider Sigma Designs (SIGM) — weighs in at 0.11%.

This level of diversification found in PSCT, despite so few holdings, should provide investors with a lower level of risk than you would normally expect from a small-cap technology ETF.

If you’re going to invest in XLK or the final technology ETF on our list, you’re wise to also pick up PSCT. It won’t cost much more, and it will give you impressive coverage in this all-important sector of the economy.

Technology ETF #3: First Trust NASDAQ Technology Dividend Index Fund (TDIV)

technology-etf-tdivIn this day and age of low interest rates you can’t forget dividends. Everyone’s chasing them; as a result yield-hunting’s become a national past time. Heck, who doesn’t like getting paid while waiting for the eventual move upward?

With so many companies mesmerized by dividends and share repurchases these days rather than reinvesting in their businesses, it makes sense to consider a technology ETF focusing on income.

The First Trust NASDAQ Technology Dividend Index Fund (TDIV) is the most expensive of the trio in terms of fees — its annual expense ratio is 0.5% — but sometimes it pays not to be cheap.

This is definitely one of those times.

With tech stocks — and stocks in general, for that matter –going nowhere so far in 2014, an ETF focused on dividends is a natural place to look for outsized returns.

The TDIV has a 30-day SEC yield of 2.7%, 90 basis points higher than the XLK. And with fewer than 100 holdings and 58% of its $466 million in total net assets invested in the top 10, it is very similarly composed to the XLK. Their top 10 components are the same, with the exception of TDIV holdings Hewlett-Packard (HPQ) and Texas Instruments (TXN).

TDIV is less than two years old, so it doesn’t have much of a track record. However, in the past year, the fund has achieved a total annual return of 22.7%, equal to the much laarger XLK. It also has returned 2.3% this year, or 215 basis points greater than the XLK.

While there’s temptation to dismiss TDIV because its expense ratio is three times that of XLK — don’t. As long as dividends remain a key aspect of capital allocation in American business, TDIVs downside in tougher times likely won’t be nearly as volatile.

This technology ETF in combination with PSCT might just be a better play than XLK/PSCT.

Long-term, either choice will do just fine.

As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


Article printed from InvestorPlace Media, https://investorplace.com/2014/04/technology-etf-xlk-psct-tdiv/.

©2024 InvestorPlace Media, LLC