Technology sector clearly has long-term growth prospects for investors. This is especially so for those willing to remain invested as the sector should continue to outperform the market over time. (See: Inside The Cloud Computing ETF (SKYY)
It is also true that many view the sector with skepticism since the tech bubble burst more than a decade ago. However, times have clearly changed for the better. Valuations are now based on stronger fundamentals and careful selection of investments has yielded good long term returns for many funds. The Technology sector has a PEG ratio of 0.70, the lowest among the ten broad sectors that comprise the S&P 500, per Capital IQ.
Technology ETFs reduce any inherent volatility by careful selection of securities to create widely diversified portfolios. The start of fiscal 2012 has been more than good for technology sector ETFs, partly driven by Apple’s (AAPL) excellent growth which enhanced the returns of the funds which have high allocation to the technology giant.
Our top recommendation for the investors with low risk tolerance, seeking exposure to broad technology sector is Vanguard Information Technology ETF (VGT - ETF report), which is Zacks Rank # 1 (Strong Buy) ETF. We expect it to outperform its peers with similar (low) level of risk.
About Zacks ETF Rank
The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, style box, or asset class. Our proprietary methodology also takes into account the risk preferences of the investors. The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of five ranks within each risk bucket. Thus, Zacks Rank reflects the expected return of an ETF relative to other ETFs with similar level of risk.
Vanguard Information Technology ETF (VGT - ETF report)
VGT tracks the performance of the MSCI US Investable Market Information Technology 25/50 Index which holds a total of 415 stocks.
It includes stocks of companies that serve the electronics and computer industries or that manufacture products based on the latest applied science.
The fund manages a $2.5 billion asset base and provides exposure to a large basket of 416 technology stocks. The fund also offers liquidity as it trades with an average (3 months) volume of 180,000 shares. (Guide to the 25 Most Liquid ETFs) Although small allocations have also been made to mid caps and small caps, VGT appears to be tilted towards large caps. (Mid Cap ETF Investing 101)
Despite broad exposure to technology stocks, VGT appears to be concentrated among its individual holdings, as its top 10 holdings make up more than 59% of the total assets allocated. This suggests that company-specific risk is pretty high in the case of VGT and the top 10 holdings dominate the returns of the fund.
The highest fund allocation goes to Apple, with 19.1% of asset invested, which implies that the performance of the fund is somewhat dependent on Apple’s performance. (Three Great Tech ETFs That Avoid Apple).
This is followed by Microsoft (MSFT) and International Business Machines Corp (IBM) with asset investment of 8.1% and 7.5%, respectively. This tech ETF charges an expense ratio of 19 basis points on an annual basis and has a yield of 0.71%.
With this focus, the fund has a reasonable P/E ratio at 15.5 which can be considered an attractive level from the technology sector perspective. The fund’s P/B stands at 3.1, a decent level considering that the fund has a long-term earnings growth rate of 26.9% a year.
This technology sector Vanguard fund has been able to put up a return of 10.06% over a period of one year (as of July 31, 2012). A look at the year-to-date performance suggests that fund has performed quite well gaining 18.67%. (Three Technology ETFs Outperforming XLK)
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