PowerShares Dynamic Software (PSJ) and iShares S&P North American Tech-Software (IGV) have jumped in the Sector Momentum Tracker’s ETF Sector Momentum Table in recent weeks, with PSJ moving from the No. 25 spot on February 3 to the No. 8 spot on April 28 and IGV moving from No. 53 to No. 16 during the same period. While the two funds share five of their top 10 components, ETF success is not measured by contents alone. PowerShares’ May 1 announcement that 19 ETFs would soon be shuttered reinforced the reality that investors should weigh multiple factors when choosing between similarly themed ETFs. PSJ and IGV both have experienced steady upward movement in our rankings, but it is the differences between the two funds that individual investors should consider before scooping up shares.
PSJ tracks the Software Intellidex, which includes 30 exclusively U.S. companies, while IGV’s iShares S&P North American Technology-Software Index Fund tracks 41 holdings that are headquartered in either the U.S. or Canada. While IGV has more components than PSJ, there are differences in the funds’ weightings. IGV’s top component, Symantec Corp (SYMC), composes 8.13% of the portfolio, while PSJ’s top component, Autodesk Inc. (ADSK), makes up only 5.93% of the total portfolio. Looking at the big picture, IGV’s top 10 components constitute 58.29% of the total portfolio, while PSJ’s top 10 make up 47.24%. Investing in any subsector ETF carries a higher risk of volatility, and although IGV’s assets are spread over more holdings than PSJ’s, there is a greater concentration of the portfolio in the top components.
Important differences between IGV’s and PSJ’s fees and strategies should also be considered by prospective investors. Management fees for IGV are 0.48% compared to PSJ’s 0.63%, and while IGV’s indexing strategy is rebalanced on a semiannual basis, PSJ’s is adjusted on a more frequent quarterly basis. PSJ’s index is designed to identify software companies with the “greatest potential for capital appreciation” by evaluating fundamental growth, stock valuation, investment timeliness and risk factors. IGV employs a representative sampling approach wherein U.S.-traded software companies based in the U.S. and Canada are compiled into a large index and then a smaller representative index is drawn from the overall selection. This smaller index is not designed to beat the larger index; rather, it is designed to mirror its performance. PSJ attempts to “do more” in terms of its indexing strategy, which outperformed IGV’s strategy significantly over the past year when compared to the S&P 500. For the 12-month period ending May 1, according to Morningstar, PSJ beat the S&P 500 by 22.81% while IGV bested the benchmark by only 10.93%.
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One considerable gap between the two funds is average daily trading volume; IGV’s three-month average is nearly 200,000 shares, while PSJ’s is less than 30,000. While these numbers put IGV and PSJ in neither the high nor the low end of ETF trading trends, the difference in volume could be significant to small investors. IGV’s volume puts the fund into a comfortable range; although it doesn’t see millions of shares changing hands each day, the volume is relatively spread out over the course of the day. PSJ’s volume likely will be enough to keep the fund from closing in the short term, but the lower liquidity could make for more erratic intraday trading as well as greater premiums and discounts for small investors getting in and out.
Number of holdings, significance of holdings and methodology aside, IGV seems to have won the popularity contest over PSJ as measured by trading volume. Trading volume, or liquidity, is perhaps the most important factor for individual investors to consider when choosing between two similar ETFs. PSJ, however, wins out when comparing returns over the past year—and the heightened attention toward performance numbers has been undeniable in current market conditions. Investors should measure risk and reward and should consider their time frames. PSJ might maintain greater momentum over time, but for investors who need to get in and out of their software investments quickly, IGV might be a wiser choice. Some ideas catch on, while others fade and disappear. Prospective investors should examine all their options and weigh their objectives before choosing a software ETF.
