Tech ETFs Provide Wider Exposure Than Stocks

While long-term trends make techs look appetizing at these levels, shorter-term recessionary fears make them appear potentially toxic. Fortunately, technology exchange-traded funds offer broad, cheap exposure to the sector for both bulls and bears alike.

The tech-heavy Nasdaq Composite Index is down 17% year to date and more than 23% from a 52-week high hit on Halloween. Research in Motion (RIMM), Apple (AAPL), Amazon.com (AMZN) and Google (GOOG) were the Four Horsemen of 2007, driving a disproportionate share of the Nasdaq's 10% gain. Now each of them has come up lame, dropping anywhere from 15% to 40% so far this year.

That fire sale has put the Nasdaq's forward price/earnings multiple at just 20, according to Birinyi Associates, which would suggest that tech is a screaming buy. Yet it can find no takers. The market is saying that Street estimates are still too high and the Nasdaq has further to fall.

But as muddy as the near-term outlook is, longer-term trends support the case for tech. Businesses that don't have a penny to spare today will still need to cut costs and improve productivity tomorrow, something they achieve by investing in tech. And at some point, consumers, presumably and hopefully, will have enough money after buying gas and food to go back to gobbling up all the digital goodies that Apple, Sony (SNE) and all the others can dream up. But when the marquee names become such money-losing propositions, it feels almost impossible to wade in. That's where tech ETFs may make a lot of sense.

Kevin Mahn, managing director and portfolio manager at Hennion & Walsh Asset Management, says there's a place for sector ETFs in your portfolio, but warns against overdoing it, especially with something as volatile as tech. "I would never recommend that an individual investor have a large portion of their portfolio in a single sector," he says. "It could be part of a diversified portfolio, but it certainly shouldn't represent a large allocation."

For broad exposure to the tech sector there are a number of ETF options with more popping up all the time. Perhaps best known is the PowerShares QQQ Trust (QQQQ), also called the Cubes. Tracking the largest nonfinancial stocks listed on the Nasdaq, the Cubes' top holdings include Cisco Systems (CSCO), Microsoft (MSFT) and Oracle (ORCL).

The Cubes, however, have about 40% allocated to nontech stocks. For pure tech with even broader exposure, there are a host of choices. The iShares Dow Jones U.S. Technology Sector Index ETF (IYW) holds all the usual suspects, as does the Technology Select Sector SPDR ETF (XLK).

Branching out even further is the iShares S&P Global Technology Sector Index (IXN). This ETF runs the gamut from International Business Machines (IBM) and Hewlett-Packard (HPQ) to overseas giants such as Nokia (NOK), Samsung and Nintendo.

The economic meltdown has Adam Harter, director of operations at Financial Enhancement Group, pretty leery of tech right now, but one area he likes is software. "We think money's got to go to software whether we're in a recession or not," he says. "That's because the overall economy has had great productivity increases over the years, but mainly due to demographics. Sooner or later companies are going to have to spend the phenomenal amounts of cash that they have to keep that productivity up, and that money has got to go to technology." Harter recommends i Shares S&P GSTI Software Index (IGV) as the best software ETF.

Also at the subsector level, if you believe that consumers will take their economic stimulus checks to the Apple store rather than the grocery store, PowerShares Dynamic Hardware & Consumer Electronics Portfolio (PHW) is probably the best bet on gadgets.

As for chip stocks, analysts see considerably more downside in the near future. Three ETFs that'll let you buy semiconductors on the dip are the iShares S&P GSTI Semiconductor Index (IGW), PowerShares Dynamic Semiconductors Portfolio (PSI) and the SPDR S&P Semiconductor (XSD).

On the other hand, if you'd like to ride chips all the way to the bottom, or are simply bearish on the whole tech sector for the immediate future, there are short tech ETFs that, used sparingly and carefully, can offer a tactical hedge. As the name suggests, the UltraShort Semiconductor ProShares ETF (SSG) goes up as chips stocks go down. If you want to short the broader tech sector, the Short QQQ ProShares (PSQ) offers inverse returns to the Nasdaq-100, while the ProShares UltraShort QQQ (QID) doubles the drop of that index. Then there's the UltraShort Technology ProShares (REW), which is designed to correspond to twice the inverse performance of the Dow Jones Technology index.

That said, we're buy-and-hold types around here. As gloomy as things look now, with a long enough horizon there are certainly tech bargains to be had throughout the sector. Kenny Landgraf, president of Kenjol Capital Management, is holding very little tech these days. "The market's broken," he says. "But amidst the carnage, it is going to present some big opportunities. It's encouraging to see business like Cisco and IBM just go out and execute. At some point we're going to look back and say that was a buying opportunity."