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By Richard Bloch

With many ETFs, a fairly large percentage of their holdings are concentrated in just a few stocks. A classic example is Apple (NASDAQ:AAPL), which accounts for more than 20% of the performance of the NASDAQ-100 index [tracked by (QQQQ)].

One of the larger technology-specific ETFs is the Technology Select Sector SPDR (NYSEARCA:XLK), which tracks the performance of S&P 500 technology companies. In this fund, Apple represents nearly 12% of the holdings.

Both the QQQQ and the SPDR Select Sector funds (along with many others) track indices that use a modified market capitalization approach to calculating the index. The bigger the company, the more impact it has on the fund’s share price.

But one technology ETF uses more of an equal-weighted approach to indexing. The SPDR Morgan Stanley Technology ETF (NYSEARCA:MTK) doesn’t seem to be all that popular, but it has been trading for more than 10 years and is “a broad-market technology barometer dedicated exclusively to the electronics-based technology industry,” according to the fund’s fact sheet (pdf).

A different balance of holdings

Here’s a look at the top 15 holdings in the MTK fund, along with how those companies are weighted in the SPDR technology ETF:

Stock % of MTK % of XLK
Nvidia (NASDAQ:NVDA) 4.65% 0.58%
Applied Materials (NASDAQ:AMAT) 3.15% 0.84%
Sap (NYSE:SAP) 3.11% -
Adobe (NASDAQ:ADBE) 3.09% 0.66%
Ericsson (NASDAQ:ERIC) 3.00% -
IBM (NYSE:IBM) 3.00% 7.72%
Hewlett Packard (NYSE:HPQ) 2.99% 3.39%
Nokia (NYSE:NOK) 2.99% -
Cisco (NASDAQ:CSCO) 2.98% 4.61%
Qualcomm (NASDAQ:QCOM) 2.96% 3.40%
EMC Corp (NYSE:EMC) 2.95% 2.02%
Ebay (NASDAQ:EBAY) 2.86% 1.42%
Texas Instruments (NASDAQ:TXN) 2.86% 1.59%
Apple (AAPL) 2.84% 11.97%
Netapp (NASDAQ:NTAP) 2.81% 0.82%

The top 10 holdings in MTK represent only 32% of its holdings. In comparison, the top 10 stocks in the XLK account for more than 60% of its holdings.

You might note that Nvidia (NVDA) seems to be overweighted in the MTK if just by a bit. That’s probably because even though the fund was last rebalanced late last year, NVDA is up about 65% this year alone. (According to the fund’s prospectus, the MTK fund is rebalanced annually in late December).

Rebalancing to equal weights may be either a benefit or a drawback, depending on your point of view. The stocks that perform well do get trimmed back, but then again you do gain exposure to stocks such as Nvidia, NetApp, and Adobe that just don’t really move the needle much in the larger ETFs.

Performance over two time frames

Here’s a look at the performance of both MTK and XLK going back to late 2008:

(Click to enlarge)

And here’s a look at both ETFs since mid June:


(Click to enlarge)

Finally, here’s a look at both funds using the SEC’s standardized reporting format:

MTK annualized returns as of 12/31/10 1 YR 5 YR 10 YR
Return before taxes 15.38% 5.25% 0.20%
Return after taxes on distributions 15.20% 5.19% -0.03%
Index 16.03% 5.75% 0.50%
Return after taxes on distributions and sale of fund shares 10.00% 4.50% -0.01%
Expense ratio 0.25%
XLK annualized returns as of 12/31/10 1 YR 5 YR 10 YR
Return before taxes 11.65% 5.01% -1.22%
Return after taxes on distributions 11.07% 4.75% -1.40%
Index 11.87% 5.17% -1.02%
Return after taxes on distributions and sale of fund shares 7.52% 4.21% -1.09%
Expense ratio 0.20%

Potential downside: Low volume, poor liquidity

One downside I can see with the MTK fund is its low volume, which you can see in the daily chart below. On an average day over the past three months, fewer than 9,000 shares traded.


(Click to enlarge)

I’m actually surprised this fund still exists at all. Even though it was launched more than a decade ago, its total net assets are only $252 million (compared to $6.8 billion for XLK). Low volume and low ownership means there are likely to be large bid/ask spreads at any given time.

So this fund probably isn’t a great short-term trading vehicle, but the bid/ask spread could be less of an issue if you have a longer-term focus and like the fund’s portfolio.

If you do invest, just be sure to use limit orders when buying or selling. And be patient. With low volume like this, hours can go by without one single trade. Boring for daytraders, but perhaps not so humdrum over the long term.

Important Notes
Investors should consider the investment objectives, risks, and charges and expenses of a mutual fund or ETF carefully before investing. A mutual fund/ETF’s prospectus contains this and other information, and should be read carefully before investing. To obtain a prospectus, contact the fund or email us at customerservice@zeccotrading.com.

All investments involve risk, including the potential to lose principal invested. Current performance of investments may be different than the data quoted.

Content, including research, tools and securities symbols, is for educational and informational purposes and should not be intended as a recommendation or solicitation to engage in any particular securities transaction or investment strategy. You alone are responsible for evaluating which securities and strategies better suit your financial situation and goals, risk profile, etc. The projections regarding the probability of investment outcomes are hypothetical and not guaranteed for accuracy or completeness. They do not reflect actual investment outcomes and are not guarantees of future results, and do not take into consideration commissions, margin interest and other costs that will impact investment outcomes. Content may be out of date or time-sensitive, and is subject to change or removal without notice. Supporting documentation for any claims made in this post will be supplied upon your email request to editor@zecco.com.

Source: A Tale of Two Tech ETFs: An Equal Weighted Alternative