Broader Tech ETFs Outperform Narrower Sub-Sectors

For those who are not enamored with a broad-based tech sector investment like the iShares Dow Jones Technology Fund (IYW), there are a number of sophisticated alternatives. Software, Semis, Networking, Internet, "Nano, Nano" -- sub-segments are plentiful.

Still, what evidence has suggested that it is sensible to deviate from a large-cap growth play like the iShares Dow Jones Technology Fund? Have investors generated greater results by "going narrow"?

The 2-year returns point to better results from diversification across tech. Only one of the five sub-sector tech ETFs (i.e., Software) out-hustled the iShares Dow Jones Technology Fund.

The other four? At best, they tended to be more volatile and close approximations of the broader option. At worst, as in the case of the PowerShares Lux Nanotech (PXN) fund, they failed to live up to the hype.

Perhaps one should look closely at a fund like the iShares Goldman Sachs Software Fund (IGV). It proved its mettle in 2008, by holding its ground far better than generalized tech.

Yet First Trust DJ Internet (FDN) investors have seen far greater volatility and far greater downside risk, only to come up on the shorter end of the stick. Worse yet, Goldman Sachs Networking (IGN) and State Street Semiconductors (XSD) investors have come up flat after 2 years. That's 2000 basis points, or 20% less, than the garden variety Dow Jones Technology Fund.

This is hardly the first time that I have presented compelling evidence that favors diversification. I've done the same for regional funds versus single-country funds.

Granted, there have to be winners in shorter periods. However, the longer one stretches out the investment time horizon, the less likely a single country can out-muscle its regional benchmark. And that goes double for a small slice of tech... unlikely to beat a comparable index in the long run.

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