The growth of the ETP lineup to 1,300 products and beyond has been fueled largely by the development - and success - of funds other than the “plain vanilla” offerings that offer exposure to well known stock and bond indexes. As the ETF industry has grown in size, it has also become more granular in nature. Many of the products out there are ideal for fine tuning tactical exposures, focusing in on a specific asset sub-class of investment strategy.
Once upon a time, the universe of sector ETFs consisted of products that sliced and diced economies into nine different industries, such as financials, industrials, materials and utilities. But the evolution of ETFs has taken sector-specific exposure to another level, as dozens of products now offer ways to tap into targeted sub-sectors of both the U.S. economy and global stock market. Perhaps no industry has been sliced as finely by the ETF boom as the tech space. There are now ways to offer almost every imaginable corner of this market through exchange-traded products. Going far beyond funds such as the Technology SPDR (XLK) or Vanguard Information Technology ETF (VGT), we profile some more tech ETFs below.
ETRACS Internet IPO ETN (EIPO)
This recently-launched ETN tracks a unique index that provides exposure to Internet-related companies that have been publicly traded for less than three years. EIPO offers a way to access a group of young companies that have attracted a significant amount of attention thanks to high profile public offerings. Many of the component stocks are experiencing tremendous growth–but many of them are also yet to turn a profit. Many investors are curious to see how this strategy will work after seeing the IPO performance of companies like LinkedIn (LNKD), which is one of the largest allocations in the underlying index. Other holdings include popular internet names like Pandora Media (P) and OpenTable (OPEN). Though this product has just 20 holdings, the roster could expand in coming months, as Internet-based firms such as Facebook and Groupon lead a robust lineup of young companies that could soon go public. For those investors looking to amplify exposure to this segment of the tech market, this ETN has a 2x monthly leveraged cousin, EIPL.
DJ Internet Index Fund (FDN)
Similar to EIPO, this product also tracks an index comprised of companies with operations that focus on the Internet (specifically, companies must generate at least 50% of annual sales/revenues from the Internet). This ETF includes many of the “older generation” of Internet firms; more established companies such as Google (GOOG), Amazon.com (AMZN) and eBay (EBAY) make up big chunks of exposure, though smaller and younger Internet companies are also represented. Though the fund is primarily based in U.S. securities, the fund does allocate a small portion of its assets abroad, an important exposure to note. A deeper look at the holdings shows that FDN spreads its assets across companies with various market capitalizations. Though the fund has a tilt toward large caps, it has significant exposure in small cap firms as well.
S&P North American Technology-Multimedia Networking Index Fund (IGN)
IGN seeks to replicate an index that measures the performance of U.S.-traded multimedia networking stocks. Investors should note that this product has just 35 holdings, with 64% of assets dedicated to the top 10 securities, meaning that these top-ranked holdings will have a large impact on the performance of the fund. Top holdings include names like Cisco (CSCO), Qualcomm (QCOM) and Juniper Networks (JNPR), and though it would appear that this product would favor large-cap firms, it spreads its exposure nicely across various-sized companies.
Networking firms may face an uncertain future as cloud computing continues to gain a foothold, but the dismal year-to-date performance for this fund has potentially created an attractive entry point.
Dynamic Software (PSJ)
PSJ from PowerShares tracks the Dynamic Software Intellidex Index, an “intelligent” benchmark that uses various quant-based screens with the objective of selecting the software stocks poised to experience the greatest capital appreciation. With only about 30 holdings in all, names like Oracle (ORCL), Microsoft (MSFT) and Red Hat (RHT) make their way into PSJ’s top holdings. This ETF tends to invest in companies of smaller sizes, which make this product a bit more risky, as some of the these smaller companies have trouble dealing with bumps in the road. PSJ will be another product to watch as the cloud computing industry begins to take flight. PSJ charges an annual expense ratio of 0.60%.
Lux Nanotech Portfolio (PXN)
This product seeks to replicate a benchmark that includes a group of companies involved in developing, manufacturing and funding nanotechnology applications. As such, nearly 50% of the fund’s assets are dedicated to micro-cap companies, making this ETF a risky, but potentially rewarding, investment. For investors who believe that the future of the nanotech space is bright, a satellite position in PXN could be an interesting way to enhance the long-term return potential of a portfolio. Nanotech has struggled so far in 2011, as this ETF has lost about 10% of its value on the year.
ISE Cloud Computing Index Fund (SKYY)
SKYY made one of the biggest debuts of any new product of 2011, as investors were extremely excited at the thought of an ETF dedicated solely to the cloud computing industry. The fund remains immensely popular, trading well over 300,000 shares daily, and nearly $50 million in assets in less than a month on the market. Top holdings of this product include Amazon, Netflix (NFLX) and Salesforce.com (CRM). Though it is too early to comment on the performance of this product, which charges fees of 0.60%, its potential for long term growth is very high, which may make it an attractive option for your portfolio.
Disclosure: Jared is long CSCO.
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