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Trade Technology Stocks with ETFs

Companies / Tech Stocks Aug 27, 2009 - 07:23 AM GMT

By: Money_and_Markets

Companies

Best Financial Markets Analysis ArticleRon Rowland writes: For many investors, tech stocks are the only stocks. Everything else is “the old economy.” Technology is where it’s at.

I spent a big part of my early career at IBM — the original tech stock — so I know the sector well. Not to mention that I live in the “Silicon Hills” of Austin, home to hundreds of technology start-ups.


Early buyers of companies like Microsoft (MSFT), Apple (AAPL), Cisco (CSCO), and Intel (INTC) enjoyed exponential growth. Wouldn’t it be great to get in on the ground floor of the next big thing?

Of course it would. The problem is that we don’t know the future. Individual technology stocks are a roll of the dice. Maybe the company you’re considering has the combination of ideas, talent and capital that leads to success. More likely, it doesn’t.

Wish you had bought Apple twenty years ago?
Wish you had bought Apple twenty years ago?

This doesn’t mean the whole sector is a gamble. Far from it! The pace of innovation is picking up every year. And as the global economy recovers, I expect the technology sector to lead the markets higher.

Thanks to the exchange-traded-fund (ETF) revolution, you now have many more ways to get involved in technology. No longer is your choice limited between risky individual stocks and technology mutual funds with high fees and onerous trading restrictions. ETFs offer a safer, less expensive, and easier way!

Here are some technology ETF ideas for you. As you’ll see, you can trade the whole sector or zero in on niches that may be hot.

Broad-Based Tech

If you want to play the technology sector as a whole, you can pick from several broad-based sector ETFs. Two of the most popular are Select Sector Technology SPDR (XLK) and iShares Dow Jones U.S. Technology (IYW). Both are very liquid and own the familiar large-cap domestic tech stocks, like Hewlett-Packard and IBM.

These ETFs provide a great way to get quick, broad exposure, but they can be a drawback as well. They may not have as much upside when particular sub-sectors are growing faster.

To fill that void, you can look at …

Niche Technology ETFs

This group lets you identify several distinct categories within the tech sector. As the market grows, these sub-sectors are getting less and less dependent on each other. This is a trading opportunity — if you can predict where the momentum is shifting.

With focused ETFs, you can now buy and sell these niches just as easily as you trade the entire sector. Here are a few examples:

Semiconductors: The companies that design and build semiconductors and related equipment are an industry all their own. Specialty ETFs covering this group include iShares S&P North American Technology — Semiconductor (IGW), PowerShares Dynamic Semiconductor (PSI), and SPDR S&P Semiconductor (XSD).

Computer software tells the machines what to do.
Computer software tells the machines what to do.

Software: It’s no stretch to say that software runs the world. Two ETFs that specialize in software companies are iShares S&P North American Technology — Software (IGV) and PowerShares Dynamic Software (PSJ).

Networking: The tech revolution really took off when computers started talking to each other. The equipment that makes this possible is yet another technology sub-sector. You can buy it with PowerShares Dynamic Networking (PXQ) and iShares S&P North American Technology — Multimedia Networking (IGN).

“Clean” Tech: If you’re concerned about the environment, you might want to look at PowerShares Cleantech (PZD), which specializes in earth-friendly tech stocks.

Nanotechnology: This one is still science fiction in some ways — but so was space travel fifty years ago. Nanotechnology is all about creating devices and materials so tiny they have to be manipulated at the molecular level.

It’s far too early to determine which companies will dominate this industry, so it’s best to buy a basket of stocks to get the exposure you desire. And there’s no better way to buy a basket of stocks than with an ETF that follows this region of the market: PowerShares Lux Nanotech (PXN).

Tech vs. Telecom

I remember a time, not so long ago, when conservative investors bought telephone stocks for their steady income. Seems quaint now, doesn’t it?

The line between technology and telecommunications can be hard to draw these days. How do you classify AT&T, for instance? They provide old-fashioned phones as well as internet service.

Obviously the technology and telecom sectors overlap each other. In fact, the most popular technology ETF, Select Sector Technology SPDR (XLK), doesn’t even attempt to make a distinction and combines them both into one fund.

However, there are ETFs with “telecom” in their name, and they tend to be dominated by the big cellular stocks as well as companies that make networking equipment. Examples include Vanguard Telecom (VOX) and iShares Dow Jones U.S. Telecommunications (IYZ).

Global and International Tech

Surprisingly to some people, not all technology companies are American. In fact, some of the top players are in other regions of the world: Companies like Samsung, Nokia, Canon, SAP, and Research in Motion are all headquartered outside the U.S.

Technology is a global industry.
Technology is a global industry.

But you won’t find these stocks represented in many U.S. ETFs because they’re considered “foreign” stocks. Yet they are still critical tools for the tech investor.

If you want access to these stocks, you need to look for an “international” or “global” technology ETF. (Rule of thumb: Global means the whole world — U.S. and foreign. International means non-U.S.).

ETFs in this category include: iShares S&P Global Technology (IXN), SPDR S&P International Technology (IPK), and WisdomTree International Technology (DBT).

As you can tell, technology is a global industry — and a growing one. So investors need to be familiar with this sector … the opportunities can be enormous if your timing is right.

Best wishes,

Ron

P.S. I’m now on Twitter. You can follow me at http://www.twitter.com/ron_rowland for frequent updates, personal insights and observations about the world of ETFs.

If you don’t have a Twitter account, sign up today at http://www.twitter.com/signup and then click on the ‘Follow’ button from http://www.twitter.com/ron_rowland to receive updates on either your cell phone or Twitter page.

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .

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