Make Money in These Small, Dynamic Software Stocks

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some smallish software companies to your portfolio, the SPDR S&P Software & Services ETF  (NYSEMKT: XSW  ) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The SPDR ETF's expense ratio -- its annual fee -- is a low 0.35 %. The fund is small, too, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.

This ETF is too young to offer a track record worth examining. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

Why software?
Our planet's businesses and population are likely to keep demanding more and better software, and as the global economy recovers, sales should get a boost. Software is also appealing because of the typically strong profit margins in the industry and the relatively low capital spending.

Some small software companies  had strong performances over the past year, but a great many did not. Tangoe (NASDAQ: TNGO  ) , a specialist in telecom lifecycle management software, gained 3%. It has been assailed by Copperfield Research, but has been reporting solid growth recently. Learn more before jumping in, or perhaps just hold off and keep an eye on the company until more dust settles.

Splunk (NASDAQ: SPLK  ) , which has not quite been trading for a full year yet, is loved by some due to its involvement in Big Data, for which many have high expectations. But others worry about its significant competition, and it received a bit of a downgrade  back in November from Needham. My colleague Alyce Lomax thinks the stock has gotten ahead of itself.

Fellow Big Data concern TIBCO (NASDAQ: TIBX  ) sank 4%, partly on finally posting some disappointing results after a long string of strong ones. It cited softness in orders as well as some weather interference, but management remained upbeat. The stock's slump has some of my colleagues excited over an attractive entry point.

Sapient (NASDAQ: SAPE  ) has five-year average annual growth rates for revenue and earnings topping 15% , and has been growing in part via acquisitions. Bulls like its relative consistency. In its last quarter, revenue grew by 9% (11% on a constant currency basis), and its forward P/E is a reasonable 15.

The big picture
Demand for software isn't going away anytime soon. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.


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