The current earnings season has highlighted a few trends in the tech sector — software companies are showing very strong growth, uncertainty over a rebound in server sales is mounting, and mobile phone sales may remain depressed for longer than expected. In addition, some of the largest U.S. tech companies are now in the crosshairs of an antitrust campaign.
The largest and most popular technology ETFs, The Technology SPDR Fund (NYSE: XLK) and Vanguard’s IT ETF (NYSE: VGT) have both shown perfectly acceptable growth this year. However, they are both market cap weighted – that means heavily invested in Microsoft and Apple, with little contribution from some of the top performing smaller tech companies.
The following three ETFs are all invested in tech stocks, but each uses a different method to select and weight stocks. These funds may be better placed to navigate the next six months if there is further realignment within the sector.
Invesco Dynamic Software ETF (NYSE: PSJ)
Invesco’s software ETF is a concentrated fund with just 31 constituents from the software industry. A smart beta approach is used to manage the fund by combining price momentum, earnings momentum, quality, management action, and value. The fund is also unique in that its holdings are spread across different company sizes, unlike most funds which are biased to larger companies.
Large-caps make up just 40% of the fund, while mid-caps, small caps, and micro-caps make up 33, 16 and 11% of the fund respectively. The result is that relatively large allocations can be made to top performing smaller software companies. The largest holdings are Synopsys, Veeva Systems, Microsoft, and Atlassian Corporation PLC, with market values ranging from just $18 billion up to $1 trillion.
With a focus on software companies, it’s not surprising that this fund has already performed well this year. However, it also appears well positioned for the rest of the year. The expense ratio is a little high at 0.63 but is justified when one considers the intelligent indexing used to manage the fund.
John Hancock Multi-Factor Technology ETF (NYSE: JHMT)
The John Hancock Multi-Factor fund also takes a smart beta approach but includes stock from the entire tech sector. It uses a multi-factor approach, including size, profitability, and value, to select securities. The fund has a higher number of holdings at 128 and has a relatively low expense ratio (0.4%) for a smart beta fund.
The result is that while high-quality large caps like Microsoft and Apple are still included, the fund is less concentrated around these stocks. Over 24% of the fund is dedicated to mid-caps, which can have meaningful exposure. Companies with poor fundamentals are excluded which should leave the fund less exposed if volatility in the tech sector continues.
Invesco DWA Technology Momentum ETF (NYSE: PTF)
Invesco’s momentum-based tech fund has already managed a 39% gain for the year. Whether or not this fund is suitable for long term investors is debatable, but it does appear well positioned for the remainder of this year due to the way in which its index has changed over the last few quarters.
Many of the tech companies currently facing challenges – semiconductors companies and FANG stocks in particular – have already been removed from the index. In their place are companies that have shown strong price momentum in the last two quarters. Most of these companies are also showing strong earnings momentum and on average should continue to perform through the rest of the year.