ETFs

Tech ETFs Likely To Boom

By Kevin Grewal

As the economy starts to show signs of prosperity and tries to mend the wounds caused by the recession, the technology sector is likely to boom.

For starters, the sector appears to have strong fundamentals and is relatively cheap as compared to other sectors.  In fact, as a whole, the sector boasts a projected five year PEG ratio of 1.1, which indicates that value on the expected growth of the sector is prevalent.  In general, a lower PEG translates to higher value because an investor would pay less for each unit of earnings growth.

Additionally, big technology companies are known to hoard cash, which makes it that much easier to expand into new businesses and hold onto competitive advantages.  With excess cash, these companies are able to take on risk without being at the mercy of a tight credit market. 

According to a recent study by the Wall Street Journal, tech giants Apple Inc (AAPL), Oracle Corp. (ORCL), Google (GOOG) and Microsoft (MSFT) along with six other companies have accumulated a whopping $68.5 billion in new cash over the past two years and are putting it to use.

Google has entered the mobile phone and computer operating systems market, trying to grab piece of the pie from both Apple and Microsoft.  Microsoft has used some of its cash to enter the search engine business and compete with Google, as well as launched a new operating system, Windows 7, which is expected to run on the majority of personal computers by the end of 2011.  As for Apple, it is using its cash to remain innovative by developing the hyped iPad as well as enter new markets through acquisitions.   Enterprise software giant Oracle used its excessive cash to expanded its business arm into the computer hardware business through its acquisition of Sun Microsystems. 

To add icing to the cake, history suggests that companies tend to increase their technology budgets as economies enter periods of recovery, which will likely be beneficial for all of these companies. 

To get diversified exposure to these technology behemoths, some possible plays include:

  • the Technology Select Sector SPDR (XLK), which holds Microsoft, Apple, Google and Oracle in its top holdings.  XLK closed at $23.00 on Thursday and is up 52% over the last year.
  • the PowerShares QQQ (QQQQ), which mimics the technology driven Nasdaq 100 and gives exposure to IP based networking giant Cisco Systems (CSCO) and wireless communications giant Qualcomm Inc. (QCOM) in addition to the previously mentioned companies.  QQQQ  is up 62% over the last year and closed at $47.83 on Thursday.
  • the Software HOLDRs (SWH), of which 38.4% of its asset base belongs to Microsoft and Oracle.  SWH also gives ample exposure to one of the world’s largest enterprise application software for corporations, SAP AG (SAP).  The ETF closed at $42.61 on Thursday and has gained nearly 53% over the last year.

Although the positives outweigh the negatives, it is important to keep in mind the inherent risks and increased volatility that comes with investing in the technology sector.  A good way to mitigate these risks is through the implementation 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 mentioned ETFs could come to an end at the following price points: XLK at $22.27; QQQQ at $46.14; SWH at $41.51.  These price points change on a daily basis as market conditions fluctuate and updated data can be found at www.SmartStops.net.

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