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Currently, the technology sector is the biggest slice of the S&P 500 by far. According to the SPDR website, this corner of the market makes up close to 22% of the key benchmark, well ahead of the second biggest sector, financials (14%). Thanks to this, it should be no surprise to investors that the Technology SPDR (XLK - ETF report) is by far the most popular sector SPDR that State Street offers as the fund has amassed over $8.3 billion in AUM and trades well over 11 million shares a day. Predictably, this is far and away the highest amount of assets in any single fund targeting the technology space although there are over two dozen other choices in the sector to choose from as well.
Many investors might be interested to note that some of these funds, and especially a few of the more targeted products in the sector, have actually outperformed XLK by a pretty wide margin over the past three year period. Furthermore, these levels of outperformance often come despite these upstart products charging more in fees or having less in liquidity, a factor that could add to total costs in the long run. Nevertheless, investors who are searching for more exposure to the tech space shouldn’t just rely on the biggest and most popular fund in the space, but should instead look to a number of smaller funds that could offer similar exposure but with more promising returns (see Inside The Cloud Computing ETF).
For investors curious as to which corners of the tech world have been carrying the technology sector higher or for those looking to make a play on strong performers in the space, the following three ETFs could be worth a closer look. While all three have underperformed XLK over the past 52 weeks, they have thoroughly crushed the popular SPDR over the past three year period in which the State Street fund put up an annualized gain of 20%. These funds even beat out this lofty figure when taking into account XLK’s rock-bottom expense ratio of 20 basis points a year, suggesting that the following ETFs could present an interesting opportunity for those willing to venture off of the beaten path in the technology ETF world.
One of the pest performing sectors over the past three years in the tech space was undoubtedly the networking industry as represented by the PowerShares Dynamic Networking ETF (PXQ - ETF report). This fund gained just under 30% a year for the past three years, outpacing XLK by about 1,000 basis points a year on average. The fund accomplished this by tracking a dynamic index which selected securities based on a variety of investment criteria including, growth, valuation, timeliness, and risk factors. The product charges 63 basis points a year in fees and holds just 30 securities, suggesting that it is heavily concentrated and capable of big swings in a short time period (read ETFs. Vs Mutual Funds).
For investors seeking the big winner over the past three years, look no further than the internet space. The top performing ETF in entire tech space was from this sector, the PowerShares Nasdaq Internet ETF (PNQI - ETF report) which produced an annualized return of 35.9% over the past three years. The product tracks an index of the largest and most liquid U.S.-listed companies engaged in internet-related businesses and that are listed on one of the major U.S. stock exchanges and includes 63 components in total. Fees are triple what XLK charges, however, the incredible rate of outperformance has more than made up for this 40 basis point differential (see Understanding Leveraged ETFs).
(For another star performer in the space make sure to check out (FDN - ETF report) as well. The fund also tracks an internet-focused index and has gained on average 32% a year for the past three years.)
Broad Tech ETFs
Although First Trust’s AlphaDEX methodology can’t compete with many funds on cost or volume, the series can often make up for these factors with strong performance from a capital appreciation perspective. This was the case for the company’s play on the broad tech sector, the Technology AlphaDEX Fund (FXL - ETF report) which gained an annualized 23.1% a year. While this is roughly 300 basis points more than XLK, investors should note that the product charges 70 basis points a year suggesting that close to half of the difference is eaten up by fees (read Alternative ETF Weighting Methodologies 101).
Nevertheless, the product is one of the few broader funds that have outperformed XLK in the time period and its active methodology could help it stay ahead more so than the sector based products. In fact, FXL ranks tech stocks on a variety of factors, eliminating the worst ranked 25% while putting more weight behind firms with high rankings. While this does increase costs, it actually does produce a basket that is less concentrated in the top securities and one that holds more stocks than its State Street counterpart.
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