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Technology ETFs: A Lesson in Diversity

XLK a little top-heavy; FXL and PTF might be too watered down


During the heyday of the dot-com boom, the idea of diversification in technology investments was to hold several different mutual funds. After investors discovered the different funds essentially owned the same stocks, the drop that occurred when the market crashed left very little in hand.

Portfolio transparency of ETFs is a benefit that will go a long way to prevent a repeat of past mistakes. Passively managed ETFs publish the holdings so an investor knows what is acquired when the ETF shares are purchased.

The Technology Select Sector SPDR (NYSE:XLK) ETF has been in existence for more than 10 years. XLK invests in technology stocks that cover the full spectrum of information technology and services. The top 10 holdings and weightings are:

  • Apple (NASDAQ:AAPL): 14.94%
  • IBM (NYSE:IBM): 8.37%
  • Microsoft (NASDAQ:MSFT): 8.18%
  • AT&T (NYSE:T): 6.98%
  • Google Class A (NASDAQ:GOOG): 5.65%
  • Oracle (NASDAQ:ORCL): 4.36%
  • Verizon (NYSE:VZ): 4.29%
  • Intel (NASDAQ:INTC): 3.81%
  • Cisco Systems (NASDAQ:CSCO): 3.73%
  • Qualcomm (NASDAQ:QCOM): 3.62%

Even though there are a total of 84 holdings in this ETF, more than 23% is held just between two stocks. With the resignation of Steve Jobs as CEO of Apple, future leadership problems could affect the stock price, and consequently XLK.

First Trust Technology AlphaDEX Fund (NYSE:FXL) is a recent addition to the growing population of technology funds. This ETF was brought to the market in May of 2007 and is designed to track the technology stocks of the Russell 1000 index. The result was a completely different looking portfolio. The top 10 holdings and weightings are:

  • Varian Semiconductor (NASDAQ:VSEA): 2.47%
  • SanDisk (NASDAQ:SNDK): 2.29%
  • Marvell Technology (NASDAQ:MRVL): 2.28%
  • Intel (NASDAQ:INTC): 2.19%
  • Micron Technology (NASDAQ:MU): 2.09%
  • AVX Corp (NYSE:AVX): 1.92%
  • Western Digital (NYSE:WDC): 1.92%
  • Teradyne (NYSE:TER): 1.91%
  • Cisco Systems (NASDAQ:CSCO): 1.88%
  • National Semiconductor (NYSE:NSM): 1.88%

This ETF holds 89 stocks, and there are no holdings greater that 3% in any one issuer. The most likely result is underperformance when compared to other technology programs.

The PowerShares Dynamic Technology ETF (NYSE:PTF) is an ETF based on the Dynamic Technology Sector Intellidex Index. This fund invests at least 90% of assets to the stocks in this index. With an almost five-year track record, a better grasp of past performance in light of market conditions will help in making predictions about future performance. See the price chart below:

This ETF might make a nice addition to the investor that likes to enter both long and short positions to hunt for profits. The almost $15-per-share price range has plenty of room for such possible outcomes.

The top 10 holdings and weightings of this ETF are:

  • Activision Blizzard (NASDAQ:ATVI): 2.59%
  • Western Digital (NYSE:WDC): 2.57%
  • KLA-Tencor (NASDAQ:KLAC): 2.56%
  • Motorola Solutions (NYSE:MSI): 2.55%
  • Electronic Arts (NASDAQ:ERTS): 2.54%
  • Xilinx (NASDAQ:XLNX): 2.54%
  • MasterCard (NYSE:MA): 2.53%
  • Teradata (NYSE:TDC): 2.53%
  • Apple (NASDAQ:AAPL): 2.51%
  • Symantec (NASDAQ:SYMC): 2.5%

As is the case with most conservative investment strategies, limiting holdings to a certain percentage ensures that no one stock will dominate the performance of the portfolio. Over-diversification tends to “water down” returns in the long run, which might be a reason why this is a cyclical trading opportunity.

Jeffrey L. Stouffer is the principal of Mercantile Capital Group, a Herndon, Va.-based introducing broker registered with the CFTC and a member of the National Futures Association. He can be reached at Stouffer does not have any direct or direct holdings in any of these ETFs.

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