(07/22/14) Four Ways to Play Tech

The tech sector has had an amazing run during the past year, and that is grabbing investors’ attention; its five-year average annualized return is 20.5%, says Bruce Vanderveen in Personal Finance.

So, how can investors keep up in this fast-changing sector? Funds are diversified so a few bad bets won’t break the bank, and investors do not need to constantly monitor which way the latest industry winds are blowing.

Here we’re focusing on how to play tech through ETFs, which provide a diversified way to play specific tech sectors for a low cost.

In our Fund Portfolio, we’ve chosen Technology Select Sector SPDR ETF (XLK) as the best overall way to play tech. It’s booked a 127% increase over the past five years.

98% of its holdings are US-based companies. Because of its diversification, the ETF avoids the volatility of sub-sectors, which can rapidly fall in and out of favor.

The best performing tech fund in recent years, PowerShares NASDAQ Internet (PNQI), follows an index that tracks the performance of the largest and most liquid US-listed, Internet-related companies.

PNQI has holdings in over 100 companies, and it’s weighted toward the larger, better-known Internet companies. More than 80% of PNQI’s holdings are US-based stocks.

This fund has returned 80% over the past three years and 260% over the past five years. But what you gain in return, you make up in gray hairs; volatility is about 40% higher than the average ETF.

Morningstar has consistently given it a five-star rating. For investors looking for growth with volatility, PNQI is a buy up to 67.

The best-performing chip fund is iShares PHLX SOX Semiconductor Sector (SOXX), which tracks an index of US-listed semiconductor stocks. The fund’s three-year return is 66%, and its five-year return is 141%.

The semiconductor industry is not only cut-throat, it’s cyclical, and those variables give SOXX volatility 50% higher than the average ETF. Chip stocks have been on a strong upward trend for the past year and a half, and could be due for a correction. Still, SOXX is a buy under 84.

Technology companies are not especially noted for paying dividends, but First Trust NASDAQ Technology Dividend (TDIV) is a technology ETF specifically designed to hold dividend-paying stocks.

The fund has holdings in 90 companies, 84% US-based and 16% international. It offers investors a modest 2.3% dividend plus the potential for capital appreciation.

Because the ETF’s holdings are heavily weighted toward the older, more established technology stocks, it’s a good investment for more conservative investors. Consider First Trust NASDAQ Technology Dividend under $26.