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Beyond XLK: 3 Great Tech ETFs

By Zacks Investment ResearchETFsMay 27, 2015 06:19AM ET
Beyond XLK: 3 Great Tech ETFs
By Zacks Investment Research   |  May 27, 2015 06:19AM ET
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After suffering for most of 2013, the technology sector made a strong comeback in 2014 with substantial improvement in earnings and revenue growth rates as well as beat ratios. The momentum continued even this year with the Technology sector posting the second best revenue growth (7.4%) in the Q1 season, per Zacks Earnings Trend.

While most of the credit for the Tech sector outperformance goes to Apple (NASDAQ:AAPL), we cannot rule out the underlying momentum. Most tech-biggies have considerable international exposure and thus saw their results being hurt by a stronger dollar in Q1. And as the greenback plunged to a multi-month low against a basket of currencies lately, we should not see steep adverse currency translation in Q2.

So far, the overall technology sector has delivered an earnings beat ratio of 49% and revenue beat ratio of 43.1%. Technology was the biggest contributor to the S&P 500 in terms of market cap, with the sector’s total earnings growing 6.8% (including Apple’s strong performance) .

Barring Apple, earnings growth for the sector drops to a decline of 2.4%. Yet the sector should stand to gain from recovery in fundamentals globally. Also, decent IT investment across the globe will likely lend a hand to the sector. Most of the tech giants are cash-rich and thus in a position to maximize shareholder value. As per Fidelity’s Q2 sector scorecard (which considers the factors like business cycle, fundamentals, relative valuations, momentum, and relative strength), Technology still overrules others.

Total earnings for the Technology sector are expected to be up 6.9% this year on 4.4% higher revenues. Earnings growth is expected at 10.5% in 2016 on 4.7% revenue growth, as per Zacks Earnings Trend.

This bullish backdrop was well reflected in the performance of the biggest tech ETF Technology Select Sector SPDR (NYSE:XLK) which has amassed about $13.3 billion so far. Around 7.8 million shares of XLK change hands every day. XLK is up 5.2% so far this year (as of May 18, 2015).

Investors should note that three tech ETFs, PureFunds ISE Cyber Security ETF (HACK), First Trust ISE Cloud Computing (NASDAQ:SKYY) and iShares Exponential Technologies ETF (XT) have recently been investors’ darlings too as these evolve around specialized and innovative tech concepts.

The space as a whole has seen many more outperformers lately. Below are three broad tech ETFs that have performed on par with or have exceeded the ultra-popular XLK this year, but have often been overlooked by investors. All three ETFs are top rated.

iShares North American Tech (NYSE:IGM)

This technology ETF provides exposure to North American electronics, computer software and hardware, and informational technology companies by holding a basket of 266 stocks. The fund charges 48 bps in fees.

The fund includes some of the biggest tech players such as Microsoft (NASDAQ:MSFT) (9.16%), Apple (8.43%) and Facebook (NASDAQ:FB) (3.90%). Sector-wise, Software, IT Services and Internet Software & Services take the top three spots.

IGM manages an asset base of $800 million and has gained 5.98% so far this year (as of May 18, 2015) and 2.43% in last three months. The fund has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

Fidelity MSCI Information Technology (NYSE:FTEC)

This overlooked ETF looks to follow the MSCI USA IMI (LONDON:IMI) Information Technology Index. The product invests about $359.6 million in assets. This ETF is also heavy on Apple (16.7%) and Microsoft (8.4%). From an industry look, Technology Hardware, Storage & Peripherals and software take two-fifth of the portfolio. The product charges about 12 bps in fees. It has gained 5.39% so far this year (as of May 18, 2015) and 1.80% in the last three months.

iShares North American Tech-Multimedia Networking (NYSE:IGN)

This ETF provides concentrated exposure to the domestic multimedia networking securities by tracking the S&P North American Technology-Multimedia Networking Index. Holding 24 securities in its basket, the fund puts considerable weight in its top five holdings.

The fund has accumulated over $150 million. Expense ratio comes in at 0.47%. The fund has added about 6% in the year-to-date time frame and 3.9% in the last three month. It has a Zacks ETF Rank #1 (Strong Buy) with a High risk outlook.

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Beyond XLK: 3 Great Tech ETFs

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Beyond XLK: 3 Great Tech ETFs

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