3 ETFs Overlooked By Investors [iShares Dow Jones US Technology (ETF)]

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September 16, 2014 4:52pm NASDAQ:QTEC NYSE:IYW

new etfsAfter lagging for most of 2013, technology stocks have strongly reappeared this year with substantial improvements in earnings and revenue growth rates as well as beat ratios. The sector emerged as a winner in the Q2 earnings season


exhibiting the third highest earnings growth rate among the 16 sectors.

The technology sector delivered an earnings beat ratio of 64.1% and revenue beat ratio of 65.6%. Total revenue for the S&P 500 tech companies are up 5.9% so far, on an annual basis. Most of the sector bellwethers including Intel, Google and Apple came up with strong results.  In short, performance has been much better than what we saw in the last few quarters.

Improving fundamentals across the globe, improving overseas demand and rising global IT spending are fueling growth in the tech stocks. Demand for products ranging from networking equipment to mobile-phone components are also rebounding. Per Gartner, global IT spending is expected to rise 2.1% in 2014 and 3.7% in 2015.

In the wide array of technology stocks, semiconductors have shown immense improvement this year. About 57.8% of earnings growth has come from semiconductor electronics with 80% earnings beat, followed by 31.8% growth in miscellaneous technology.

Also, the U.S. economy has stepped up enough to push high growth sectors like technology a few notches higher. In Q2, the economy expanded about 4% and is still delivering upbeat data on every aspect.

As a result, pure semiconductor ETFs or tech ETFs with higher exposure to semiconductor and high-potential miscellaneous tech stocks are worth a look at the current level. Total earnings for the Technology sector are expected to be up 12.5% this year on 4.6% higher revenues. Earnings growth is expected to be 12.2% in 2015 with 6% revenue growth, per Zacks Earnings Trend.

Investors should note that there are several ETFs which have bettered the performance this year of the biggest tech ETF S&P SPDR Technology ETF (NYSEARCA:XLK) which has amassed about $13.9 billion so far. Around 6.5 million shares of XLK change hands every day.  Below, we have highlighted three ETFs that have easily crushed this popular over the last three months, but have often been overlooked by investors.

SPDR S&P Semiconductor ETF (NYSEARCA:XSD)

This ETF is leading the broad tech world this year having returned nearly 27%. XSD tracks the S&P Semiconductor Select Industry Index and holds 50 stocks in its portfolio. The product provides huge diversification benefits across each security as none of these are allocated more than 3.1% of the total assets (read:2 Hot Summer ETFs Surging to #1 Ranks).

However, the fund is less popular and illiquid with AUM of $205 million and has an average daily volume of around 100,000 shares a day. Expense ratio is the lowest at 35 bps when compared to other semiconductor products in the space.

XSD has gained about 7.7% in the last three months and 38% in the last one year (as of September 8, 2014). This was in contrast to 5.5% three-month and 26.8% one-year gain in XLK. XSD currently has a Zacks ETF Rank#1 (Strong Buy) with a High risk outlook.

Investors should note that not only XSD, other semiconductor ETFs like Market Vectors Semiconductor ETF (SMH) and Dynamic Semiconductors (PSI) have been solid performers this year having returned about 9.2% and 5.7% in the last three months, respectively. Both ETFs have a Zacks ETF Rank #1.

NASDAQ-100-Technology Sector Index Fund (NASDAQ:QTEC)

This overlooked product offers broad exposure to the tech sector of the U.S. equity market by tracking the performance of the NASDAQ-100 Technology Sector Index. Nasdaq-100 has added about 15% this year on improving U.S. growth momentum.

The fund holds a small basket of 41 securities in equal weights. The best thing about the equal weight approach is that performance is not heavily dependent on the returns of a particular stock or group of securities.

No product accounts for more than 2.97% of the assets. From a sector look, around two-fifth share is allocated to semiconductors while software and Internet take decent allocations of 24.7% and 15.8%, respectively, in the portfolio.

QTEC has a Zacks ETF Rank #1 with a Medium risk outlook. QTEC snapped up a 7.2% gain in the last three months and 33.6% in the last one year.

iShares Dow Jones US Technology ETF (NYSEARCA:IYW)

Though this fund is not exactly overlooked by investors, it definitely has less following than XLK. This ETF tracks the Dow Jones US Technology Index, giving investors exposure to the broad technology space. The fund holds 141 stocks in its basket with AUM of over $4 billion while charging 43 bps in fees and expense (read: 3 Apple ETFs for Outperformance).

Apple occupies the top position in the basket with 18% of assets. While the technology hardware and equipment segments account for 52% of the portfolio, software and computer services take the remaining portion.

The fund has added nearly 6.5% in the last three-month period, about 16% in the year-to-date frame and 32.4% in the last one-year period. IYW has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

This article is brought to you courtesy of Zacks.


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