How can a value investor participate in the growth stocks found in most Technology Sector ETFs? Wait! That’s right, wait for a sale. The oldest ETF in this sector is the Technology Select Sector SPDR® Fund (XLK). Unfortunately, history has not been kind to this sector ETF due to its’ inception date being near the eve of the DOT COM Market Crash. As you will see in the following chart, XLK has trailed an S&P 500 index fund by 0.81 CAGR with nearly double the volatility. That’s not what most long-term value investors are looking to add to their portfolio. But, there is a way; and that way is waiting. Wait for a significant drop in this sector and then start a position in your chosen Technology fund. What is significant? For me, that’s about a 10% decline, or more. Personally, I’m in no hurry to own a technology fund, but when this sector has a steep decline, I will begin accumulating shares of my chosen tech fund.
XLK vs S&P500: January 1999 – August 2018
Source: https://www.portfoliovisualizer.com/
Although Technology funds haven’t done great when including the Dot Com Bubble burst, they have performed very well during any other shorter timeframe, including the last 5, 10 and 15-year periods. According to Morningstar, there are 59 ETFs that fit in the Technology category. In the next chart, I have ranked all the Technology ETFs that are 10 years old or older based on long-term performance.
Source: https://www.morningstar.com/
I typically focus on the top four funds for a more in depth analysis, but in this situation, I will drop PNQI and PSJ since they closely replicate FDN and PSJ. This will also help in achieving longer back-test periods to examine. So, in the following chart and analysis we will zoom in on FDN, IGV, IGM and QTEC. This will give us one internet ETF, one software ETF, one broad based tech ETF and one narrowly focused tech ETF to compare head-to-head.
FDN vs IGV vs IGM vs QTEC: July 2006 – August 2018
Source: https://www.portfoliovisualizer.com/
Now let’s look at each of these four technology fund’s stated objectives and strategies to see what we’ll be getting if we choose to invest in one of them.
FDN: The First Trust Dow Jones Internet Index Fund is an exchange-traded index fund. The Fund seeks investment results that correspond generally to the price and yield, before the Fund’s fees and expenses, of an equity index called the Dow Jones Internet Composite IndexSM. For a stock to be included in the selection universe for the index, a company must generate at least 50% of its annual sales/revenues from the Internet. To be eligible for the Dow Jones Internet Composite IndexSM, a stock issued through an initial public offering must have a minimum of three months’ trading history. Spinoffs will require this history only if the parent stock has itself been trading for less than three months. An index-eligible stock also must have: A three-month average market capitalization of at least $100 million; A three-month average closing price above $10 if it is not currently in the index; Sufficient trading activity to pass liquidity tests. Index components are selected from the eligible universe using a combination of three-month average float-adjusted market capitalization and three-month average share volume with a goal of capturing 80% of the float-adjusted selection universe. The index composition is reviewed each quarter. Rebalancing takes effect after the close of trading on the third Friday of March, June, September and December.
IGV: The iShares North American Tech-Software ETF seeks to track the investment results of an index composed of North American equities in the software sector. Exposure to a broad range of software companies. Targeted access to North American software stocks. Use to express a regional sector view.
IGM: The iShares North American Tech ETF seeks to track the investment results of an index composed of North American equities in the technology sector. Exposure electronics, computer software and hardware, and informational technology companies. Targeted access to North American technology stocks. Use to express a regional sector view.
QTEC: The First Trust NASDAQ-100-Technology Sector Index Fund is an exchange-traded index fund. The investment objective of the Fund is to replicate as closely as possible, before fees and expenses, the price and yield of the NASDAQ-100 Technology Sector IndexSM. The index consists of companies in the NASDAQ-100 Index classified as Technology according to Industry Classification Benchmark (ICB).
The index is reconstituted once a year based on the NASDAQ-100 reconstitution in December, but replacements may be made during the year if there is a replacement in the NASDAQ-100 Index.
The index is an equal weighted index and is rebalanced four times annually in March, June, September and December.
I’d like to share one last chart that includes the previously mentioned ETFs and the Vanguard Information Technology ETF (VGT), since it is the largest broad-based tech ETF and the Technology Select Sector SPDR® Fund (XLK) since it is the oldest tech ETF.
Source: https://www.koyfin.com/home
If you are considering adding a Technology Sector ETF to your portfolio, I’d recommend waiting for a significant pull back in prices before starting a position. But, when the time comes to jump in, data shows that FDN is the best performing Internet ETF; IGV is the best performing Software ETF; and IGM is the best performing broad-based technology sector ETF.
Thank you for taking time to read this article. If you found it useful, please share it with a friend.
Respectfully yours, Micah McDonald, aka the Deep Value ETF Accumulator
Disclosure: We own shares of FDN and intend to buy more shares in the future. I am not a professional investment advisor. Please perform your own due diligence or seek assistance from a Registered Investment Advisor prior to investing in any fund mentioned in this article.