Source: Flickr user GOTCREDIT.
The proliferation of ETFs has arguably been the best trend for ordinary retail investors over the last decade. Because they are composed of many different stock holdings, ETFs offer investors instant diversification, much like mutual funds. However, ETFs generally offer this diversification with lower fees, more price transparency, and better tax efficiency.
However, you should still learn about an ETF and the niche it represents before you buy a share of it. This is especially important in the fast-moving technology field. With that in mind, let's look at three tech-sector ETFs with more than $200 million assets under management that outperformed their peers last week as the Nasdaq Composite shed 4%.
A technical analysis trading ETF leads the pack
Leading all technology ETFs is the Invesco PowerShares DWA Technology Momentum ETF (NYSEMKT: PTF), which was a hair below breakeven for the week. Although this ETF is considered passive, it does track the Dorsey-Wright Technology Technical Leaders Index, which uses technical analysis to select investments based on their historical performance and "momentum." The index rebalances its holdings quarterly.
And while we at The Motley Fool don't believe technical analysis is a reliable way to achieve long-term market outperformance, this ETF contains a lot of rock-solid tech companies. For example, Apple and Facebook together comprise nearly 10% of this ETF.
There are a few things investors should know about this ETF. Although the underlying investments follow trading-based rules, the ETF has large bid-ask spreads, making it a poor option for a trading vehicle. For long-term, buy-and-hold investors, the net expense ratio of 0.60% is a little high compared to those of other broad-based technology ETFs.
A technology ETF without Apple?
Although this may sound preposterous, there's a broad-based ETF that does not include Apple as a holding. The First Trust Dow Jones Internet ETF (FDN 1.22%) offers investors similar exposure to many other big tech stocks but explicitly excludes the largest technology holding, because Apple does not meet the fund's criterion of generating at least 50% of annual revenue from the Internet.
If you're in the market for a broad-based technology ETF that's free of Apple's considerable influence -- perhaps because you're nervous that Apple is too dependent upon iPhone sales -- then this could be a good investment. The fund's top five holdings are a virtual who's-who of large-cap Internet companies: Amazon.com, Facebook, Alphabet A and C shares, and Salesforce.
While I like that this ETF has over $4 billion in AUM, nearly half of which ($1.7 billion) came from fund inflows (read: new investing money) in the trailing 12 months, I'd like to see the expense ratio of 0.57% come down. As many investing companies' expenses are fixed, a larger AUM base could still pay these expenses if the annual expense ratio is cut and all else remains the same. For the week, this ETF lost 1.1%.
A good week for software
On a comparative basis, this was a good week for software. BlackRock's iShares North American Tech-Software ETF (IGV +0.40%), which tracks the S&P North American Software Index, only lost 1.3% versus the greater Nasdaq.
The ETF is quite concentrated -- probably because the software industry is rather concentrated. The top five holdings (Microsoft, Adobe, Salesforce, Oracle, and Intuit) comprise over 40% of the ETF. For those who already have concentrated positions in these companies, this may not be the best investment.
While this iShares ETF has a lower expense ratio than the others mentioned here, Blackrock has not committed to further lowering its annual fee of 0.47%.
ETFs have transformed the investing landscape as much as the move to low-cost, online-based brokerages. For investors looking for diversified exposure to the technology market, ETFs are a lower-cost vehicle that appears to be in the midst of increasing price competition. In the battle of Wall Street versus Main Street, ETFs are looking like a win for the latter.
