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Technology ETFs in Slump

Stocks in this article: XLK SMH REW

By Michael Johnston, founder of ETF Database

NEW YORK ( TheStreet) -- Technology ETFs have hit a wall in recent days, slumping on news of an analyst downgrade to Research in Motion (RIMM), slashes in projected semiconductor demand, and weak earnings reports from several Internet companies.

With an uncertain holiday shopping season ahead, the fate of the technology sector is very much up in the air, and technology ETFs could be on the move in coming weeks.

BMO Capital Markets cut its rating on Blackberry maker Research in Motion on Wednesday, pointing to increased competition from Verizon as consumers opt for less expensive smartphones. Also weighing on the tech sector were weak results from Salesforce.com (CRM) and Autodesk (ADSK), which lost about 3% and 10%, respectively, during yesterday's session.

On Thursday, BofA Merrill Lynch lowered its 2010 growth forecast for global semiconductor industry and downgraded 10 chipmakers, including Intel (INTC). "While we believe the correction will likely prove short and shallow, we think any hint of a correction in the supply chain could punish (semiconductor) stocks," BofA Merrill told its clients in a note.

BofA Merrill cut its 2010 growth estimate for the sector from 21% to 18%, due in part to anticipated weakness in demand for PCs. More than 40% of semiconductor sales are directly or indirectly linked to PC sales, making the chip sector dependent on demand for computers.

ETF Plays on Technology

For investors looking to make a play on technology, there are dozens of ETF options, ranging from broad-based sector funds to more targeted niche ETFs. Here a few.

  • SPDR Technology Select Sector Fund (XLK): This broad-based technology fund includes both consumer products companies like Apple (8.5% weighting) and more traditional business-to-business companies like Cisco (6.4%). XLK is up more than 40% on the year, although it has pulled back slightly in recent sessions.
  • HOLDRS Merrill Lynch Semiconductor (SMH): This ETF includes several of the companies downgraded by Merrill, meaning it will likely tumble on Thursday. But if the revised forecast for growth proves overly pessimistic, the slip in share price of SMH could create some buying opportunities. Other semiconductor-specific ETFs include iShares Goldman Sachs Semiconductors Index Fund (IGW), SPDR S&P Semiconductors ETF (XSD), and PowerShares Dynamic Semiconductors (PSI).
  • ProShares UltraShort Technology (REW): For investors who think the technology sector is headed for a downward correction, REW offers a way to gain inverse leveraged exposure to the sector. It should be noted that REW focuses on delivering daily returns of the Dow Jones U.S. Technology Index, so it requires regular monitoring.

At the time of publication, Johnston did not have any positions in the equities mentioned. Michael Johnston is the senior analyst and founder of ETF Database, a Web-based investment resource providing actionable ETF investment ideas and an ETF Screener for investors analyzing potential ETF investments. Johnston oversees ETF Database's free ETF Newsletter, one of the most popular sources for news and commentary focusing exclusively on the exchange-traded fund industry. Johnston also maintains and develops content for ETFdb Pro, a line of analyst reports and model portfolios designed to help investors utilize ETFs to meet their investment goals.

Johnston has completed the Chartered Financial Analyst (CFA) program, and obtained his bachelor's degree in finance from the University of Notre Dame. Prior to founding ETF Database, Michael worked in a private client service group performing valuations of companies operating in a wide range of industries.

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