ETF Trends
ETF Trends

Like most sectors, the technology sector has its up years and its down years. But unlike most sectors, when the technology sector and related exchange traded funds (ETFs) are up, they tend to be up big.

The Ins and Outs of Technology

The technology sector is largely made up of aggressive growth-type companies that dabble in industries and sub-sectors such as research and development, computers, software, communications, the internet, semiconductors or other segments of the technology sector. Biotechnology, though usually most often considered part of health care territory, can also fall under the tech industry’s umbrella.

The tech sector is largely made up of two types of companies: large and established corporations with strong cash flow and a large market share, or small companies developing new ideas or patents and backed by lots of venture capital.

Tech Fundamentals

In the last several months, the tech sector has been increasingly backed by stronger fundamentals, including:

  • Tech stocks have gotten a lift from growth in overseas markets, which has led to increasing demand for computers and gadgets.
  • Domestically, not even a recession and high unemployment can outweigh the desire for the latest gadget, whether it’s an iPhone, Droid or a Blu-Ray player. Apple (NASDAQ: AAPL), in fact, was recently given an outperform rating by an analyst who cited the company’s stock rising 30% since August, Forbes reports.
  • Like others, technology companies are sitting on piles of cash that’s waiting to be deployed. Some companies are using it to merge with others, while other corporations are biding their time.
  • Investors’ risk appetite is improving, thanks to confidence- and economy-building initiatives, such as to the Federal Reserve’s $600 billion bond-buying program.
  • Although the recession might have curtailed corporate IT spending, such spending is last to be cut and first to be reinstated. Not having the latest technology can be costly for companies.

Analysts say there’s another signal in the tech rally: it’s a sign that the broader stock market has room for yet more growth. Tech stocks are historically among the top performers at the start of a bull market. That has certainly been true of the market’s most recent rally; the NASDAQ wrapped up 2010 up 19.2% while the S&P 500 rose 12.8% and the Dow Jones Industrial Average gained 11%.

Technology ETFs

Technology ETFs come in a variety of flavors. Two of the most common are:

  • Sub-sector funds, such as those tracking a basket of semiconductor makers or networking software companies. Examples include PowerShares Dynamic Semiconductors (NYSEArca: PSI), Vanguard Information Technology (NYSEArca: VGT) and First Trust Dow Jones Internet Index (NYSEArca: FDN).
  • Broad funds those simply own the largest and most influential players in the sector. Examples include ETFs like Technology Select Sector SPDR (NYSEArca: XLK), PowerShares QQQ (NASDAQ: QQQQ) and iShares Dow Jones U.S. Technology (NYSEArca: IYW).

There are also leveraged and inverse options for both broad technology exposure and sub-sector exposure, such as ProShares Ultra Technology (NYSEArca: ROM) and Direxion Daily Technology Bear 3x Shares (NYSEArca: TYP).

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.