As the latest earnings season gets into full gear, one sector has dominated the headlines with powerful results. Technology stocks have blown away analyst estimates, dominating with higher sales and income.
By the time you hear about those blowout earnings, however, it's too late to profit from them. Rather than paying close attention to when each company is coming out with its next earnings report, you can take the simpler route: owning your fair share of all of them through a technology ETF.
A quick update
In case you haven't been in the loop over the past week or so, the young earnings season has already had a number of huge tech stories:
- Google posted profits, revenue, and margins that all beat expectations soundly. And those results were for a quarter that didn't even include the impact of its new Google+ social networking product, which has come out to a rocketing start.
- IBM (NYSE: IBM) rode the wave of its international business to big beats on the top and bottom lines. Although much of the gains came from favorable currency adjustments, they only underscore the point that IBM has become a truly global business.
- Last night, Apple (Nasdaq: AAPL) joined the chorus with yet another huge earnings beat, with earnings per share clocking in nearly $2 higher than Wall Street had expected. Big gains in iPad and iPhone sales led the charge, helping gross margins improve by more than 2.5 percentage points.
Later this week, you'll see reports from other major tech companies, including Qualcomm (Nasdaq: QCOM), Microsoft (Nasdaq: MSFT), and Intel (Nasdaq: INTC). These releases aren't expected to go gangbusters like the ones we've seen already -- expectations are for all three to post only modest gains over last year's results. But given the surprises so far, investors have to be ready for anything.
But how can you take advantage of the tech trend? One way is to have the foresight to know exactly which companies will do well and which will lag behind the leaders. But if you don't trust yourself to have that analytical ability, relying on tech ETFs to get you the exposure you want to technology stocks can be a whole lot simpler.
What you get
Exchange-traded funds were initially designed to give investors a way to gain diversification in a product you can buy and sell like a stock. But as ETFs got more specialized, they also started narrowing their focus from tracking the broadest market indexes to drilling down on particular investing themes and types of stocks.
With the huge power of top technology stocks, most tech ETFs have huge percentages of their assets invested in them. For instance, the SPDR Select Technology ETF (NYSE: XLK), which holds 83 different tech stocks, has more than 42% allocated to the six companies listed above. The Vanguard Information Technology ETF (NYSE: VGT) weighs in at almost 40%.
So while tech ETFs may give you some benefits of diversification, they also give you exactly what many investors want: a strong concentration in the biggest tech stocks, including those that have posted such amazing results recently.
The (small) downsides
Of course, ETFs aren't perfect. As with any fund, you'll pay a fee to cover the fund's expenses. But the advantage of ETFs is that those costs tend to be small compared to other types of funds -- just 0.20% annually for the SPDR and 0.24% for the Vanguard ETF.
The other big disadvantage of ETFs comes from the same source as their advantage: a diversified portfolio can water down your results. So if Apple surges today, tech ETFs will rise -- but almost certainly not as much as Apple's own shares. Diversification protects you on the downside, but it also costs you versus making a big single-stock bet that pays off.
Take a look
If you haven't looked at ETFs yet, you owe it to yourself to see what you're missing. ETFs aren't right for everyone, but as a simple way to get exposure to a certain type of investments, they can work wonders for your portfolio.
If you're looking for some ideas of ETFs to look at, we've got some suggestions for you. The Motley Fool recently came out with a special free report identifying three ETFs with great prospects. Give us your email address and we'll get it to you pronto.
