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TheStreet Open House

The Hottest Technology Funds

NEW YORK ( TheStreet ) -- When they want exposure to technology, many investors turn to Technology Select Sector SPDR (XLK), which tracks the technology stocks of the S&P 500. But some less-well-known choices have outperformed the SPDR fund lately.

While Technology Select Sector returned 9.8% this year, Guggenheim S&P 500 Equal Weight Technology (RYT) gained 20.1%, according to Morningstar. Other exchange-traded funds that outperformed by a wide margin include PowerShares S&P Smallcap Information Technology (PSCT) and First Trust Nasdaq Technology Dividend (TDIV). The winners have excelled because they give little or no weight to some of the biggest mega-cap stocks, which have been laggards.

Much of the SDPR fund's shortfall lately has been due to a handful of stocks. Apple (AAPL), which accounts for 13.7% of the assets in the ETF, has lost 19.9% this year. Other big SPDR holdings that have delivered modest returns are International Business Machines (IBM) and AT&T (T).

When the mega-caps rebound, the SPDR fund will outdo its competitors. Still, the smaller ETFs are worth considering because they can help to diversify portfolios -- and it is possible that the funds will outdo the SPDR fund over the long term.

A top choice is the Guggenheim equal-weight fund. During the past five years, the equal-weight fund returned 9.3% annually, compared to 8.7% for the SPDR sector fund. The two funds hold basically the same stocks, but the allocations are very different.

Like the S&P 500 and most other common benchmarks, the SDPR fund weights its holdings according to their market capitalizations. So the stocks with the greatest market values account for the most weight. The equal-weight fund puts about the same assets into each of the 70 stocks in the technology sector.

The market cap approach tends to put heavy weightings in a few stocks. The SPDR fund has 8.6% of assets in Microsoft (MSFT), compared to weighting of 1.7% for the equal-weight fund. Because of SPDR's emphasis on mega caps, the holdings in the fund have an average market capitalization of $100 billion, compared to $16 billion for the Guggenheim equal-weight fund. A focus on the biggest stocks could be a disadvantage for buy-and-hold investors. Many academic studies have shown that smaller stocks outdo bigger ones over the long term.

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