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The Hottest Technology Funds

Proponents of the equal-weight approach argue that the system can outperform because it requires regular rebalancing. Under the system, stocks that soar must be trimmed back to their target weightings. Meanwhile, the fund has to buy more shares of laggards that sink below their target. In effect, the portfolio manager is constantly buying cheap stocks and selling expensive ones, a formula for outperformance. In contrast, funds that rely on market-cap weighting must continually buy more of the hottest stocks.

While the rebalancing may provide a boost over the long-term, the system does not shine every year. The equal-weight fund has lagged SPDR during difficult markets when investors preferred the safety of mega-caps. In the turmoil of 2008, SPDR outpaced the equal-weight fund by four percentage points.

PowerShares S&P SmallCap Information Technology does not hold Apple or any of the other big stocks in the S&P 500. Instead, the ETF owns the technology names from the small-cap S&P 600 index. Many of the little-known names in the small-cap benchmark have been soaring lately. In the past year, the fund returned 33.2%, outpacing the SPDR fund by 20 percentage points.

The small-cap fund has benefited from the improving economy. As investors have become more confident, they have gravitated to smaller technology stocks. The small stocks have seemed particularly appealing because they derive most of their sales in the U.S. In contrast, many mega caps are big exporters. That has been a negative factor at a time when the European economy remains stalled, and investors have begun to worry about the outlook for China and other emerging markets.

First Trust Nasdaq Technology Dividend has an average market capitalization of $55 billion. While the portfolio includes mega-cap dividend payers such as Apple, the fund does not own Google (GOOG), which does not pay a dividend. The dividend fund yields 2.8%, compared to a figure of 1.9% for the SPDR fund.

The First Trust fund could be particularly appealing for income-oriented investors who have emphasized traditional dividend funds such as iShares Dow Jones Select Dividend (DVY). The traditional choices have focused on sectors such as utilities and consumer staples, which have long paid rich dividends. But the dividend funds are typically underweight technology, since many names in the sector have not paid dividends.

By adding the First Trust fund to a dividend portfolio, investors can diversify their holdings. In addition, many technology companies are rapidly increasing their dividends. Such dividend growth could boost the stocks and reward patient investors with growing income.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.
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