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 (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 (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 (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|
|Applied Materials (AMAT)||3.15%||0.84%|
|Hewlett Packard (HPQ)||2.99%||3.39%|
|EMC Corp (EMC)||2.95%||2.02%|
|Texas Instruments (TXN)||2.86%||1.59%|
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%|
|Return after taxes on distributions and sale of fund shares||10.00%||4.50%||-0.01%|
|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%|
|Return after taxes on distributions and sale of fund shares||7.52%||4.21%||-1.09%|
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.
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