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A Standout Tech ETF

As exchange-traded funds grow in popularity, the providers face a big obstacle when they're issuing new ETFs: making sure the new ETFs actually offer something new.

For instance, big-cap tech has many broad-based ETFs, and they almost all have very similar holdings. In fact, Microsoft (MSFT) and Intel (INTC) are the largest holdings of every broad-based tech ETF except for one, the streetTracks Morgan Stanley Technology ETF (MTK), which is benchmarked to the Morgan Stanley Technology Index (MSH).

Furthermore, all of the other broad-based tech ETFs are mega-cap focused, with very large weightings in IBM (IBM), Cisco (CSCO) and Dell (DELL), in addition to Microsoft and Intel.

  • Tech Sector SPDR (XLK) MSFT 12.23% INTC 7.26%
  • iShares Dow Jones Tech (IYW) MSFT 12.94% INTC 7.96%
  • iShares Goldman Tech (IGM) MSFT 8.29% INTC 6.95%
  • iShares S+P Global Tech (IXN) MSFT 10.13% INTC 6.41%
  • Vanguard Tech VIPERS (VGT) MSFT 11.89% INTC 7.93%

MTK has much less concentration in those two bellwhethers than its peers, Intel is No. 10 at 3%, and Microsoft is No. 15, at 2.8%.

    1) Google (GOOG), 5.61%
    2) Broadcom (BRCM), 4.06%
    3) Nvidia (NVDA), 3.74%
    4) Motorola (MOT), 3.71%
    5) Hewlett Packard (HPQ), 3.71%
    6) Texas Instruments (TXN), 3.64%
    7 ) Intuit (INTU), 3.26%
    8) (AMZN), 3.13%
    9) Yahoo! (YHOO), 3.06%
    10) Intel, 3%

The unique composition offers MTK a couple of advantages, including more consumer exposure through its Internet holdings, which creates broader exposure within the sector, less single-stock risk and a smaller average market cap than XLK ($56 billion for MTK vs. $68 billion for XLK).

A couple of months ago I wrote an article about the lag of mega-cap tech stocks making the risk/reward generally unattractive. It makes sense to think that the mega-caps will rotate into favor at some point. But until then, MTK offers a way to access the technology sector without the single-stock risk inherent in all the other tech ETFs.

Depth Creates Chop

Of course, the unique composition creates some issues, too. Because of its companies selected and the number of holdings (35), investors should expect more volatility from MTK than the other tech ETFs.

StreetTracks Morgan Stanley Technology ETF (MTK:Amex)
Large number of holdings can add to volatility
Source: Roger Nusbaum, Your Source Financial

Over the last two years, MTK has had a tight correlation to volume leader XLK, but it has started to pull away, thanks to its exposure to Google and Broadcom.

The one-year chart shows that MTK lags slightly in downturns and outperforms during upturns. Over the last year, a mediocre year for the sector, MTK has outperformed the second-best-performing ETF, the Vanguard Technology VIPERS, by 110 basis points.

The MTK Outperforms
It beats Vanguard's tech VIPERs
Source: Roger Nusbaum, Your Source Financial

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