By The ETF Professor
On the surface, it would appear to be a disappointing year for technology sector ETFs. The Technology Select Sector SPDR (XLK) is up a mere 9.9 percent year-to-date, a performance that trails the SPDR S&P 500 (SPY) by 670 basis points.
Of the nine sector SPDRs ETFs, XLK ranks seventh on a year-to-date basis and is being kept out of the last place by the Materials Select Sector SPDR (XLB) and the Utilities Select Sector SPDR (XLU), the latter of which has wilted in the face of rising interest rates.
What is disappointing about the performance of the cap-weighted, large cap-focused XLK is that when stripping out AT&T (T) and Verizon (VZ) to focus on the pure tech names among the ETF's top-10 holdings, five of the remaining eight names have traded higher this year. In fact, XLK is not even the best U.S. technology sector ETF issued by State Street Global Advisors. That honor goes to the SPDR Morgan Stanley Technology ETF (MTK), which has returned 15.3 percent this year with some help from Facebook (FB) and Priceline.com (PCLN).
Still, it is possible to find market-beating U.S.-focused tech ETFs. Even when excluding the PowerShares S&P SmallCap Information Technology Portfolio (PSCT), has been a stellar performer in its own right, investors could have done this year with tech ETFs this year.
The right tech ETFs that is. Some of this year's top tech ETFs share an important trait in common. These funds offer investors exposure to the increasingly prominent theme of fundamental weighting methodologies.
Take the PowerShares Dynamic Technology Sector Portfolio (PTF) as one example. PTF is weighted by factors including rice momentum, earnings momentum, quality, management action, and value. None of the ETF's 61 holdings account for more than 2.82 percent of the fund's weight. Apple (AAPL) is not a member of PTF's lineup, which is a good thing given that the stock has traded lower this year.
Speaking of Apple, well-documented has been the stock's impact on various ETFs and how funds with excessive to the stock are vulnerable when Apple falls. Equal-weight ETFs avoid that conundrum.
The First Trust NASDAQ-100-Technology Sector Index Fund (QTEC) and the Guggenheim S&P 500 Equal Weight Technology ETF (RYT) are up an average of 20.5 percent this year. Both funds feature scant allocations to Apple, but the same goes for their exposure to Google. RYT actually has a slightly larger weight to Yahoo (YHOO) than it does Google. RYT is up 21.6 this year, meaning it has topped Google by 260 basis points.
The First Trust Technology AlphaDEX Fund (FXL) also eschews cap-weighting in favor of a mix of growth and value factors, including price appreciation, sales to price and one year sales growth, book value to price, cash flow to price and return on assets.
Apple happens to be FXL's largest holding at 2.3 percent of the fund's weight. The 1.35 percent allocation to Google is well below the weights given to 3D Systems (DDD), Groupon (GRPN) and Yahoo, just to name a few. The result is an ETF up 19.6 this year.
Another thing these ETFs share in common is not none are particularly large, though three have over $100 million in assets under management. Combined, PTF, QTEC, RYT and FXL have about $707 million in AUM compared to $11.3 billion for XLK.
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Disclosure: Author does not own any of the securities mentioned here.
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