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Top Ranked Software ETF in Focus: PSJ

PSJ XLK

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The broader technology sector, which delivered a lackluster performance during the first half of the year, was back on track during the second half. Thanks to impressive third quarter earnings on the back of improving fundamentals within the developed markets and reviving emerging market nations, the sector is again on the favorite list for investors.

Moreover, strong balance sheets with large cash balances, relatively low levels of debt and growing dividends are some of the key factors that are paving way for the sector’s outperformance.

Though broad tech is delivering handsome returns to investors in the year-to-date time frame, software ETFs have delivered better returns than the broad Tech ETF Technology Select Sector SPDR (XLK - ETF report) (read: 3 Hot Sector ETFs for 2014).

Per Zacks Earnings Trends, the IT sector is expected to report the highest revenue growth for Q4, led by 16.0% increase in revenue growth for Internet Software & Services Industry.

Given the positive trends in the software space, a good way to seek entry into the broad tech world is by tilting toward ETFs in this segment. While there are a number of ways to invest in this surging corner of the market, a look at the top ranked ETF could be a good idea.

One way to find a top ranked ETF in the tech space is by using the Zacks ETF Ranking system.

About the Zacks ETF Rank

A look at the top ranked Internet ETFs can be done by using the Zacks ETF Rank. This technique provides a recommendation for the ETF in the context of our outlook on the underlying industry, sector, style box or asset class. Our proprietary methodology also takes into account the risk preferences of investors.

The aim of our model is to select the best ETFs within each risk category. We assign each ETF one of five ranks within each risk bucket. Thus, the Zacks ETF Rank reflects the expected return of an ETF relative to other ETFs with a similar level of risk.

Using this strategy, we have found one ETF – PowerShares Dynamic Software Portfolio (PSJ - ETF report) – in the space that has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with a ‘Medium’ risk outlook (read: all the Top Ranked ETFs).

The details of this fund highlighted below:

PSJ in Focus

This often overlooked fund manages a small asset base of $57.81 million.

The product offers exposure to the software segment of the broad tech sector by tracking the Dynamic Software Intellidex Index. The index comprises 30 U.S. software companies that are involved in various functions related to software applications and systems and information-based services.

The fund holds a small basket of 30 stocks, with Adobe Systems Inc. (5.05%) as the top holding. This is closely followed by Activision Blizzard Inc. (4.96%) and Electronic Arts Inc. (4.95%).

This suggests that the fund is largely concentrated on its top 10 holdings (46.18%), which dominate the fund’s return. Meanwhile, mid caps take a big chunk of the fund, accounting for 36% of total assets, with small (26%) and large (24%) caps taking the remainder of the basket.

Also, the ETF basically selects stocks that exhibit growth characteristics, as these account for more than half of the portfolio which could be considered beneficial for this fund.

From a sector outlook, the fund primarily invests in IT which comprises 90.15% of total assets, with Healthcare forming the rest of the sector allocation. (see: all the Technology ETFs here).

In terms of performance, the fund has added around 29% in the last one year, easily beating the broad tech ETF XLK in the process.

Bottom Line

This ETF has delivered solid returns not only this year, but also over the long term. The trend is expected to continue given improving performances by these tech companies.

So, investors looking for tech ETFs should consider PSJ for their exposure, as it is top rated and poised to lead the way higher in the coming months.

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