The Different Flavors Of Surging Tech ETFs

The Nasdaq Composite broke a new record today, climbing above 6,000 for the first time, and delivering roughly twice the rally of the S&P 500 and the Dow Jones industrial average year-to-date.

The well-known benchmark measures the performance of securities listed on the Nasdaq, including the 100 largest companies comprising the Nasdaq 100—a subindex of the Nasdaq Composite.

While not specifically technology indices, the rise in the Nasdaq Composite and the Nasdaq 100 in many ways reflects the strength of the technology sector in the past year because technology companies dominate the exposure.

QTEC The Tech ETF Star Performer

ETFs linked to these Nasdaq-listed tech companies come in many flavors, and perhaps unsurprisingly, it isn’t the widely known PowerShares QQQ Trust (QQQ) that’s leading in gains.

In the past 12 months, QQQ has rallied about 25%. That’s a solid return, but only about half the results a fund like the First Trust Nasdaq-100 Technology Sector Index Fund (QTEC) has shelled out—up 47% in one year.

A look at some of the best-performing tech ETFs (that are not segment-focused such as semiconductor ETFs, for example) shows that slightly different approaches to technology deliver slightly different results.

Consider the following five funds, each from a different issuer, as a sampling among the best performers, and their one-year performances:

• PowerShares QQQ Trust (QQQ)
• First Trust Nasdaq-100 Technology Sector Index Fund (QTEC)
• SPDR Morgan Stanley Technology ETF (MTK)
• Guggenheim S&P 500 Equal Weight Technology ETF (RYT)
• John Hancock Multifactor Technology ETF (JHMT)

Chart courtesy of StockCharts.com

QQQ: The classic

As noted earlier, PowerShares QQQ Trust (QQQ) isn’t really a tech ETF. It’s categorized more broadly as a U.S. large-cap fund. But technology represents about 60% of the portfolio. Many investors look at QQQ as a loose proxy for U.S. tech stocks since the fund tracks the Nasdaq 100.

QQQ is hugely popular, with nearly $47 billion in total assets. The fund employs a tiered weighting scheme that leads to concentration in its biggest names, and causes more volatility in returns relative to a traditional market-cap approach.

Apple represents about 12% of the portfolio—the single largest weighting—and about four times the allocation seen in the other ETFs highlighted in this article.

QTEC: The performance leader this year with a Nasdaq focus

The First Trust Nasdaq-100 Technology Sector Index Fund (QTEC) selects its stocks simply: They must be Nasdaq-listed. The fund tracks the Nasdaq 100 Tech Index. It then equal-weights them. The approach translates into two main things. First, the equal weighting dilutes the impact of some of the largest stocks by market capitalization—names like Apple. Secondly, the fund’s focus on the Nasdaq-100 means it’s a tech portfolio that lacks exposure to some big players in this sector—names like HP and IBM.

In other words, QTEC isn’t broadly representative of the U.S. tech sector, but a focused approach to tech stocks. It owns only 35 stocks.

The fund, which came to market in 2006, has a strong following, with nearly $2 billion in assets under management. That following comes despite its slightly higher price tag of 0.60%, or $60 per $10,000 invested, or about three times the cost of QQQ.

MTK: A smart-beta equal-weighted ETF

The SPDR Morgan Stanley Technology ETF (MTK) is a veteran in the space, having come to market in 2000. The fund has $660 million in assets and carries an expense ratio of 0.35%.

The portfolio doesn’t focus exclusively on U.S. companies, but rather on U.S.-listed tech companies, which means it can own international large-cap tech names that have American depositary receipts listed in the U.S. Part of the portfolio is currently tied to Chinese and German firms.

Because it’s equal-weighted, it dilutes the impact some of the segment’s giants can have in a portfolio—names like Apple, for example. In MTK, Apple represents little more than 3% of the overall portfolio. The fund has 35 holdings.

RYT: A smart-beta equal-weighted ETF

The Guggenheim S&P 500 Equal Weight Technology ETF (RYT) is another equal-weighted approach to tech companies, but one that picks stocks solely from the S&P 500. The fund is hugely popular, boasting more than $1.2 billion in assets and enough liquidity to keep average spreads at around 0.05%.

Launched in 2006, RYT has an expense ratio of 0.40%, and owns about 58 stocks.

JHMT: A smart-beta multifactor tech ETF

The John Hancock Multifactor Technology ETF (JHMT) picks stocks by market capitalization, but weights them based on a multifactor methodology that looks at things like relative price, profitability and momentum in an effort to allocate most heavily toward companies that look to offer attractive relative value, high profitability and strong momentum.

The approach translates into a midcap bias, and some different segment tilts within tech toward software and semiconductors. The fund, which has 116 holdings, has only $41 million in assets, but it’s still relatively new, having come to market in 2015.

JHMT carries a 0.50% expense ratio.

The Universe

These five ETFs offer just a glimpse into the many choices ETF investors have in the technology sector. There are 62 tech ETFs on the market today, about half of which are U.S.-focused. Each fund offers its own take on the tech sector—a sector that continues to rank among the U.S. market’s best performers.

Contact Cinthia Murphy at [email protected]