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Technology had been the best performing sector in 2012 and it easily outperformed the S&P 500 index. Starting in January, however, this strength is apparently fading, with a big drop in Apple’s shares underscoring the broad weakness in the large cap technology ETF market (read: 3 Apple Proof ETFs).
Basically, the underperformers are from the large cap focused tech funds like Select Sector SPDR Technology ((XLK - ETF report)), iShares Dow Jones US Technology (IYW) and Vanguard Information Technology Index Fund (VGT). Software and networking funds are also on the bottom list.
Still, it is not true to say that all the tech funds are lagging (read: 5 Sector ETFs Surging to Start 2013). There are still some of them that are surging and are not affected by the Apple issues or the dull performances by many large caps. These include social media, broad internet and emerging market technology funds that have outpaced broad market expectations.
Below, we highlighted three top ETF performers which have not only managed to stay over water, but have provided returns of high single digits in the first month of 2013. These are expected to continue with their bull run even with the sluggish performance overall of the space.
Guggenheim China Technology ETF (CQQQ)
Launched in December 2009, this fund targets the China market and is leading the tech sector, though it has failed to attract investors with just $19.6 million in AUM. It seeks to replicate the price and performance of the AlphaShares China Technology Index, before fees and expenses.
The ETF is highly concentrated on its top ten holdings, taking up about 61% of the assets, suggesting that the return of the fund is much more dependent on these companies. Despite its heavy reliance, the fund generated double digits return in the first month of the year (read: Why Earnings are Key for the Tech ETF XLK).
CQQQ also pays a good 1.74% in annual dividends. This is because it has lesser focus on large caps (26%) and a large part of it is allocated toward mid and small caps securities.
Within the sector, Internet and mobile applications occupy the top position in the basket with 41% share while electronic components, communications equipment and semiconductors rounded to top four. The product holds 37 securities in the basket, of which three-fourths belong to mainland China companies and the rest goes toward Hong Kong.
The fund is the high cost choice in the space, charging a fee of 70 bps a year. Additionally, investors have to pay an extra cost in the form of a wide bid/ask spread due to its illiquid nature. CQQQ has a Zacks Rank #3 or ‘Hold’ rating.
ETRACS Next Generation Internet ETN (EIPO)
This note tracks the UBS Next Generation Internet Index and provides exposure to the next generation Internet firms, generally consisting of social networking, Internet software, and Internet service stocks.
The product consists of 22 stocks and the benchmark imposes a three-year age limit on holdings, ensuring that constituent securities remain extremely relevant and at the forefront of the industry.
In terms of individual holdings, the top spots are dominated by developed market companies from the U.S. and Europe. Three companies — like LinkedIn and Facebook — are the only ones to make up at least 10% of the EIPO, ensuring a relatively high level of concentration. In fact, the top ten holdings account for nearly two-thirds of the total assets (read: New Leadership in the Tech ETF Space?).
The ETF is heavily skewed towards small securities; large caps make up just 10% of the total assets. Meanwhile, from a country perspective, the U.S. accounts for close to two-thirds of its assets, while China (15%), Russia (10%), the UK (8%), and Australia (3%) round out the rest.
The fund has seen a solid run in the first month of the year, adding more than 9%. However, volume and assets are again low for this fund, ensuring a wide bid/ask spread along with a relatively high expense ratio of 0.65%, thus increasing the total cost for investors.
First Trust Dow Jones Internet Index Fund (FDN)
The third solid ETF performer lies in the Internet segment of the broad tech sector (read: Zacks Buy Ranked Internet ETF: FDN). Launched in June 2006, this ETF tracks the Dow Jones Internet Index, before fees and expenses.
The index measures the performance of companies that primarily earn at least half of their revenues from the Internet business and have a trading history of at least three months.
Holding 41 securities, the fund invests half of its assets in top ten firms with Internet and mobile application as the top sector within the tech. Google (GOOG), Amazon.com (AMZN) and eBay (EBAY) are the top three elements in the basket and make up for a combined 23% share.
Other firms hold no more than 5% of FDN. While large cap accounts for 55% of the assets, mid and small cap take the remaining portion in the basket (see more ETFs in the Zacks ETF Center).
The product has delivered about 9% returns over one month but yields very a meager 0.03% in annual dividends. It has managed assets worth $835.7 million so far in the year (as of January 31), charging investors 60 bps in fees per year. Trading in volume of more than 160,000 shares per day, the fund has a relatively tight bid/ask spread.
Currently, FDN has a Zacks Rank #1 or ‘Strong Buy’ rating. This suggests that this product is expected to perform well over the long haul, when compared to the other funds in the sector.
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