3 Technology ETFs To Consider With Stock Picking Getting Tougher

Includes: IXN, VGT, XLK
by: StockRiters

Like it or not, the so-called fiscal cliff and the European conundrum are two factors that are likely to make things difficult for the average investor. Apart from politics, we have central banks and large players such hedge funds working at cross purposes -- one is bent upon propping up the economy and the markets, and the other pulling stocks up and down for short-term gains.

The moot question is how does the average investor survive in a market that is not being driven by fundamentals, but by macro factors? The era of stock picking -- the buy and hope approach -- seems to have come to an end. The challenge is there, but I think there is also a way, a strategy that would give confidence and fairly good returns, even if it is for a part of your trading portfolio.

Technology sector ETFs offer a better opportunity for growth in the coming years.

Earnings growth in U.S. industrials has been pretty disappointing despite industrial stocks outperforming the broader market. The sector seems slightly top-heavy, trading as it is at 2.5 multiples of book value and 14 times forward earnings. The financial sector, which was not long ago the darling of high-dividend ETFs, is now considered to be the most volatile.

On the other hand, the technology sector, which was considered volatile, has become more stable in the last decade. It also figures in the 10 sectors that are least exposed to domestic sales. More than 60% sales of computer hardware, and nearly 85% of semiconductors, are in overseas markets. Here, I take a look at some interesting ETFs in this sector.


The objective of XLK is to provide results corresponding to the price and yield performance of the S&P 500 Index's Technology Select Sector. The index consists of industries such as IT consulting, computers and peripherals, diversified telecommunication services, semiconductor equipment and products and wireless telecommunication services. With a market cap of $9.27 billion and P/E ratio of 7.13, Technology SPDR pays quarterly dividends -- the current dividend yield is 1.54%.

Holdings of XLK include some of the top names in the technology sector, such as Apple, which accounts for 19.44% of its holdings. Other holdings include IBM (7.28%), Microsoft (7.24%) and AT&T (6.88%). Although Q3 results were below expectations, profitability was at a record high. At the same time, investors need to be aware that AAPL's performance can have a big impact on the overall performance of the ETF. However, XLK's rich price-to-book value of 2.7 is evidence of its high profitability potential.

The ETF has shown impressive growth in the last five years.

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Vanguard Information Technology Sector ETF (NYSEARCA:VGT)

The Vanguard Information Technology Sector ETF seeks to provide results comparable to the price and performance of the MSCI US Investable Market Information Technology 25/50 Index. VGT invests all its assets under management in stocks that make up the index, and holds each stock in the same proportion as the weighting in the index. The fund has a market cap of $2.42 billion and a dividend yield of 0.70. The 5-year price performance of VGT is shown in the chart below. Currently, the fund is trading at a P/E ratio of 4.72 with an EPS of $14.69.

The fund provides exposure to more than 400 technology stocks, including hardware, software and Internet. Its exposure is across the entire technology sector, but is more inclined towards the large caps, and its allocation to mid and small cap companies is quite small. VGT has a favorable expense ratio of 0.19%.

iShares S&P Global Technology Index Fund ETF (NYSEARCA:IXN)

This is an international fund that seeks to emulate the price and performance of S&P Global Information Technology Sector Index. IXN invests in stocks of companies involved in the development and production of technology products, including computer hardware and software, telecommunications equipment, microcomputer components, integrated computer circuits and office equipment utilizing technology. The fund has an EPS of $5.84 and a dividend yield of 0.85. Compared to other ETFs mentioned here, it is a small fund with a market cap of only $596.16 million.

Here are the top 10 holdings, which make up 58.27% of its total assets under management:

The fund's holding of over 100 large and mid-cap technology stocks from all around the world offers investors across-the-board exposure to the global tech sector, including the world of touch screen devices. The fund's average price-to-book ratio of 2.38 indicates that it is undervalued at this level and has a good scope for appreciation in the coming months.

Technology is a long-term robust play that is expected to be immune to the woes of prolonged slow growth that the U.S is headed for. It has emerged as a top performer and is important to economic growth. Instead of focusing on AAPL, software and a few telecoms, tech sector ETFs offer investors the benefits of a diversified exposure to computer manufacturers, search and social media.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.