Technology ETFs: A Lesson in Diversity

During the heyday of the dot-com boom, the idea of diversification in
technology investments was to hold several different mutual funds. After
investors discovered the different funds essentially owned the same stocks, the
drop that occurred when the market crashed left very little in hand. Portfolio
transparency of ETFs is a benefit that will go a long way to prevent a repeat of
past mistakes. Passively managed ETFs publish the holdings so an investor knows
what is acquired when the ETF shares are purchased. The Technology Select Sector
SPDR (NYSE: XLK ) ETF has been in existence for more than 10 years. XLK invests
in technology stocks that cover the full spectrum of information technology and
services. The top 10 holdings and weightings are: Apple (NASDAQ: AAPL ): 14.94%
IBM (NYSE: IBM ): 8.37% Microsoft (NASDAQ: MSFT ): 8.18% AT&T (NYSE: T ): 6.98%
Google Class A (NASDAQ: GOOG ): 5.65% Oracle (NASDAQ: ORCL ): 4.36% Verizon
(NYSE: VZ ): 4.29% Intel (NASDAQ: INTC ): 3.81% Cisco Systems (NASDAQ: CSCO ):
3.73% Qualcomm (NASDAQ: QCOM ): 3.62% Even though there are a total of 84
holdings in this ETF, more than 23% is held just between two stocks. With the
resignation of Steve Jobs as CEO of Apple, future leadership problems could
affect the stock price, and consequently XLK. First Trust Technology AlphaDEX
Fund (NYSE: FXL ) is a recent addition to the growing population of technology
funds. This ETF was brought to the market in May of 2007 and is designed to
track the technology stocks of the Russell 1000 index. The result was a
completely different looking portfolio. The top 10 holdings and weightings are:
Varian Semiconductor (NASDAQ: VSEA ): 2.47% SanDisk (NASDAQ: SNDK ): 2.29%
Marvell Technology (NASDAQ: MRVL ): 2.28% Intel (NASDAQ: INTC ): 2.19% Micron
Technology (NASDAQ: MU ): 2.09% AVX Corp (NYSE: AVX ): 1.92% Western Digital
(NYSE: WDC ): 1.92% Teradyne (NYSE: TER ): 1.91% Cisco Systems (NASDAQ: CSCO ):
1.88% National Semiconductor (NYSE: NSM ): 1.88% This ETF holds 89 stocks, and
there are no holdings greater that 3% in any one issuer. The most likely result
is underperformance when compared to other technology programs. The PowerShares
Dynamic Technology ETF (NYSE: PTF ) is an ETF based on the Dynamic Technology
Sector Intellidex Index. This fund invests at least 90% of assets to the stocks
in this index. With an almost five-year track record, a better grasp of past
performance in light of market conditions will help in making predictions about
future performance. See the price chart below: This ETF might make a nice
addition to the investor that likes to enter both long and short positions to
hunt for profits. The almost $15-per-share price range has plenty of room for
such possible outcomes. The top 10 holdings and weightings of this ETF are:
Activision Blizzard (NASDAQ: ATVI ): 2.59% Western Digital (NYSE: WDC ): 2.57%
KLA-Tencor (NASDAQ: KLAC ): 2.56% Motorola Solutions (NYSE: MSI ): 2.55%
Electronic Arts (NASDAQ: ERTS ): 2.54% Xilinx (NASDAQ: XLNX ): 2.54% MasterCard
(NYSE: MA ): 2.53% Teradata (NYSE: TDC ): 2.53% Apple (NASDAQ: AAPL ): 2.51%
Symantec (NASDAQ: SYMC ): 2.5% As is the case with most conservative investment
strategies, limiting holdings to a certain percentage ensures that no one stock
will dominate the performance of the portfolio. Over-diversification tends to
"water down" returns in the long run, which might be a reason why this is a
cyclical trading opportunity. Jeffrey L. Stouffer is the principal of Mercantile
Capital Group, a Herndon, Va.-based introducing broker registered with the CFTC
and a member of the National Futures Association. He can be reached at
mercapitalgroup@aol.com . Stouffer does not have any direct or direct holdings
in any of these ETFs.