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Why SSDD Is The Top Tech ETF

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As European issues continue to slowly fade away, the economic situation begins to look more bullish. Recent readings in the U.S. regarding solid jobs reports and decent levels in the ISM figures also haven’t hurt, making many investors feel more optimistic about the future. Additionally, while stocks have certainly surged to start the year, equities are at their cheapest PE level at any 52 week peak since the late 80’s. This suggests that stocks could have further to run, especially if bearish signals continue to be hard to come by.

Among the best performing sectors during this time has undoubtedly been the technology industry. The segment has benefited from improving sentiment over European issues as well as hopes of more business spending back in the U.S. as well. Thanks to this, the broad tech sector ETF, the SPDR Select Sector Technology Fund (XLK - Free Report) has handily beat out the S&P 500 year-to-date, outgaining the key benchmark by about 450 basis points in a little over eight weeks time. Yet, even this solid track record cannot compare to the strength that investors have seen in one often overlooked segment of the technology world, the solid state drive industry (also see Inside The Cloud Computing ETF- SKYY).

This segment focuses on companies that make these new data storage devices which use microchips instead of magnetic disks on in order to store data. This technology means that SSDs have no moving parts which, in addition to making them more stable, promotes quicker access speeds as well. However, this newer technology is often more expensive their hard disk drive cousins, a factor which has limited the widespread adoption of solid state drive equipment.

Yet, this is slowly beginning to change as SSDs become more competitive from a price perspective. Many believe that the technology in the SSDs is the wave of the future and that the only thing holding them back is their cost. As they find their way into more systems and are implemented on a larger scale, the price seems poised to drop making the segment a key growth industry in the technology world (see Three Technology ETFs Outperforming XLK).

In order to play this segment, UBS recently launched the E-TRACS ISE Solid State Drive Index ETN which offers targeted exposure to the industry. The note offers exposure to 11 companies in total, using an equal weighted allocation across the drive manufacturer and component manufacturer categories in order to give representation to both segments of the space. Additionally, SSDD also uses equal weighting for all components within each sector category and these are rebalanced on a quarterly basis.

In terms of top holdings, three stocks currently make up over 10% of the product including; Silicon Motion Technology (SIMO - Free Report) , SanDisk , and Marvell Technology (MRVL - Free Report) . Thanks to this, the product also has a decent breakdown across nations, putting about 30% of assets outside the U.S. For costs, the product charges 65 basis points a year in fees but sees very weak volume of less than 1,000 shares a day. This implies that bid ask spreads for the note could be very wide, which could add to the total costs of the UBS note for investors (see ETFs vs. ETNs: What’s The Difference?).  

Yet, despite the potential for higher costs and the ETN structure, SSDD could prove to be an investor favorite thanks to its strong performance this year. Like many tech sector ETFs, this fund has been on an absolute tear markedly beating the S&P 500 so far in 2012, while it has also crushed XLK as well. SSDD has gained over 30% in the time frame, more than doubling XLK and tripling other tech ETF gains since the start of January.

Given the impressive run-up, however, some investors may be betting on a slump in the next few weeks as expectations bring SSDD back to earth.  This could be premature though, especially when looking at the Zacks Rank for many of the underlying securities in the basket. Of the 11 companies in SSDD, three have the top Rank of 1 or ‘Strong Buy’ while only one has a Rank of 4 or 5 which equates to ‘Sell’ or ‘Strong Sell’. Furthermore, the only stock that does have a Rank of 4 is the smallest component in the fund while the biggest component, SIMO, currently has a Rank of 1. This suggests that earnings estimate revisions could be tilted in favor of the sector and that further gains could be had in the space (read Five ETFs To Buy in 2012).

With that being said, it is important to remember that the Zacks Rank can change quite quickly, especially if estimate trends see a reversal. Also, the SSD space is still quite fresh and is heavily concentrated, a situation that can prove to give added volatility to the space in a short period of time. However, if investors can get over the extremely low volume that is currently in the product, SSDD could be an interesting choice for those seeking targeted tech exposure in the second quarter of the year.

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