ETFs

3 Technology ETFs to Watch

By Kevin Grewal

As innovation continues to entice the consumer, technology and its exchange traded funds (ETFs) are expected to outperform most sectors in the coming year.

Technology as a sector is relatively broad, but the subsectors that are expected to perform the best include chip makers, mobile device providers and software companies.  The expected surge in chip makers and mobile device providers come hand in hand, in that as the demand in mobile devices increases so does that of the chips that are found in the devices. 

Internationally, mobile devices are expected to increase in demand as middle classes start to emerge in developing countries.  In some nations, like Taiwan and South Korea, many people carry multiple mobile phones because it is one of the only sources of infrastructure that enables one another to communicate and stay in touch.

Domestically, the demand for mobile devices is expected to increase as technological improvements widen the functionality of smartphones and increase their appeal.  Some smartphones like the iPhone by Apple (AAPL) are so technologically advanced that one could potentially run a business from the palm of his hand.  Other, like the Blackberry by Research In Motion (RIMM) enable one to access email and view spreadsheets with the touch of a button.  Additionally, most smart phones are equipped with GPS devices or an IP address which enable users to have access to information at the blink of an eye. 

According to market research firm, International Data Corporation (IDC), more than 200 million smartphones are expected to ship in 2010 and more than 1 billion mobile devices will access the Internet.  In fact, the rate of growth for mobile users is 2.5 times the rate of PC users and will likely surpass the number of people accessing the Internet via a PC.

As for software, the launch of Microsoft’s (MSFT) Windows 7 operating system is the talk of the town and many technologically savvy individuals are smiling from ear to ear stating that this new operating system is the best thing since Windows XP.  To add to software’s appeal, the penetration of Windows 7 is expected to be widespread as that the majority of PCs are expected to be running the new operating system come 2011.

ETFs that are likely to benefit from these trends include:

  • the iShares Dow Jones US Technology (IYW), which gives exposure to Microsoft, Apple and chip maker giant Intel (INTC).  IYW closed at $57.99 on Wednesday.
  • the Semiconductors HOLDRs (SMH), which gives broad exposure to semiconductors and chip makers like Intel and Texas Instruments (TXN).  SMH closed at $28.18 on Wednesday.
  • the Technology Select Sector SPDR (XLK), which gives exposure to AT & T (T) in addition to Microsoft, Apple and Intel.  XLK closed at $22.98 on Wednesday. 

Although the trends appear to be favorable for the technology sector, in particularly the mentioned subsectors, it is important to understand that these equities come with inherent risks.  A good way to mitigate these risks is through the use of an exit strategy which triggers price points at which an upward trend could potentially be coming to an end.  According to the latest data at www.SmartStops.net, an upward trend in the previously mentioned ETFs could come to an end at the following price points:  IYW at $56.46; SMH at $27.09; XLK at $22.50.  These price points change on a daily basis and are reflective of market volatility and conditions.  Updated data can be found at www.SmartStops.net.

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