Forget Big Tech; Buy These ETFs Instead

The year 2013 has been good for the equity markets so far even with high levels of volatility following the panic over the tapering talks. While most of the sectors have performed well this year, the technology sector remains stressed due to uncertainty surrounding some of the top tech players.

In fact, the SPDR S&P 500 (SPY) has posted year-to-date returns of around 14.7% and the Technology Select Sector SPDR Fund (XLK), which tracks the stock market performance of the technology segment in the U.S. equity market, is up by just about 8.7% .

The weakness in tech sector ETFs was due in large part to the sluggish performances this earnings season from the top players such as Google (GOOG), Microsoft (MSFT), International Business Machines (IBM), Hewlett-Packard (HPQ) and Intel Corp. (INTC).

This is because these firms are seeing weak overseas demand, overall reduction in global information technology spending, and a strong dollar just to name a few headwinds to global tech stocks.

While most large cap ETFs have recently shown weakness in their prices, some remained unperturbed by dull performances and are enjoying a surge in prices. Here, we have highlighted three broad tech ETFs that have less exposure to the big players and are the real winners in the current environment.

In fact, unlike large cap counterparts, these funds performed well with double digit returns and easily outpaced the SPY by wide margins in the year-to-date period (read: 3 Top Ranked Sector ETFs for Earnings Season).

PowerShares S&P SmallCap Information Technology ETF (PSCT))

Investors seeking higher returns in the tech space could find PSCT an intriguing choice. The fund provides exposure to 127 pint-sized securities by tracking the S&P SmallCap 600 Capped Information Technology Index.

The product manages an asset base of $160 million while volume is light, suggesting additional cost in the form of wide bid/ask spread beyond the expense ratio of 0.29%. In terms of holdings, the ETF is well spread across each security as none of them holds more than 2.75% of assets.

However, the fund has a tilt towards growth stocks, indicating that it will gain more when the market moves upward. The fund has returned nearly 24% year-to-date.

Guggenheim S&P Equal Weight Technology ETF (RYT)

This ETF tracks the S&P 500 Equal Weight Index Information Technology, holding 70 securities in the basket. The product seeks to follow equal allocation towards the entire spectrum of market capitalization levels, thereby minimizing concentration risk.

This approach helps to maintain portfolio balance and seems to be winning strategy for RYT. The fund has amassed $219.4 million in its asset base and it charges a higher expense ratio of 50 bps in fees per year from investors.

The ETF has added about 22.3% so far in the year.

PowerShares Dynamic Technology Sector Fund (PTF)

With AUM of $33.4 million, the fund tracks the Dynamic Technology Sector Intellidex Index. The stocks in the fund are evaluated on good investment merits such as price momentum, earnings momentum, quality, management action and value.

This produces a fund with a total holding of 60 stocks while charging an expense ratio of 65 basis points on an annual basis. The fund eliminates concentration risk here again as each security holds less than 2.65% of PTF. The ETF provides a nice mix across each asset class by allocating 44% share to small caps, 30% to large caps and the rest to mid caps.

PTF has gained over 17.8% in the year-to-date timeframe.

Bottom Line

A number of large cap tech ETFs are currently under pressure due to lackluster performances by big tech firms and are showing loses in this earnings season. Investors should focus on the tech ETFs that avoid big names at present due to economic uncertainty (see more in the Zacks ETF Center).

However, the funds discussed above seem well positioned as we progress into the second half of the year as cloud computing and mobility segments are gaining importance and offering new avenues for growth in the sector.

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