Increase Exposure To Technology Using ETFs

By Casey Murphy | April 30, 2014 AAA

Over the past twelve months, technology has been one of the hottest performing sectors in the global financial markets. Since this time last year, the PowerShares QQQ (Nasdaq:QQQ) exchange traded fund, which tracks the technology-heavy Nasdaq 100 index has climbed around 23%. As you can see from the chart below, this is a significant increase over the Dow Jones Industrial Average, which has increased just over 10%, or the S&P 500 Index, which is up around 17%. Given the nature of tech companies, it is probably unsurprising to learn this group of companies tends to outperform more stable business such as transportation, real estate and utilities while markets are rising. However, this leverage also acts as a double-edged sword when markets fall. If you believe the markets will continue to rise then adding exposure to tech stocks could be the best strategy. For more, check out A Primer On Investing In The Tech Industry

The Nasdaq 100 Ex-Technology

Many retail traders often wonder how much a given sector influences the return of a broad market index such as the Nasdaq 100. Interestingly, the exposure to technology helped increase the index’s return by 7.38% over the past twelve months. For those interested, this can can be calculated by comparing the difference in the QQQ and the First Trust Nasdaq-100 Ex-Tech Sector Index Fund (Nasdaq:QQXT). It's interesting to note that products such as the QQXT ETF were created to track the performance of the Nasdaq-100 Ex-Tech Sector Index, which is an index of securities of the Nasdaq-100 index that are not classified as technology. If one needs to limit exposure to a certain sector this type exchange traded fund is one of the best tools.

For advanced traders, this ETF can also be used strategically to remove predefined exposure to all technology companies and then give the trader the opportunity to add back positions to only the technology companies that he/she is interested in. The goal would be to add positions in tech stocks that are poised to outperform and limit the exposure to those that are facing increased competition and declining share prices. Adding individual names will increase the beta of the portfolio and should also result in higher returns. For more, see Beta: Know The Risk

Increasing Tech Exposure

For those who are wondering how to increase exposure to the technology sector, there are many different ways to accomplish this goal. Investing in the QQQ as mentioned earlier is one of the most popular methods, but many may want to invest in individual equities such as Apple Inc. (Nasdaq:AAPL), Microsoft Corp. (Nasdaq:MSFT), International Business Machines Corp. (NYSE:IBM), Google Inc. (Nasdaq:GOOG), Oracle Corp. (Nasdaq:ORCL) and Intel Corp. (Nasdaq:INTC). To increase exposure to technology, one does not need to look far past these tech giants for market-beating returns.

If investing in specific stocks is too risky, then one may wish to shift their tech-focus outside of North America and invest in a basket of global tech stocks. One globally-focused tech ETF that may warrant further investigation is the iShares Global Tech ETF (NYSE:IXN). This ETF tracks the investment results of an index composed of global equities in the technology sector and has the added benefit of removing country-specific risk. The fund holds 108 tech stocks and has a management fee of 0.48%. The most-heavily weighted names are shown above. You can see more detail of the various weightings in the table below:

Company Name

Weighting (As of April 24)

Apple

12.76%

Microsoft)

7.59%

IBM

4.70%

Google (Class A and Class C)

3.80% and 3.73%

Oracle

3.48%

Intel

3.35%

 

The Bottom Line

During rising markets, increasing exposure to technology stocks can give a lift to an underperforming portfolio. Several of the exchange traded funds noted in this article may be ideal selections for investors who don't want to bother with picking individual stocks. One option to consider is the iShares Global Tech ETF, which offers investors diversified exposure to a basket of technology names and comes with a respectable management fee. More advanced investors may want to look to ETFs such as QQXT and then choose specific technology names to come up with a customized tech-focused portfolio.

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