ETF Targets Promising Software Sector

The iShares S&P North American Technology-Software Index ETF offers exposure to the software industry.
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NEW YORK (TheStreet) -- Markets were optimistic towards the tech sector at the tail end of last week as two big players, Research in Motion (RIMM) and Oracle (ORCL) - Get Report released strong earnings reports.

I have also been optimistic on tech recently and still think broad-based ETFs providing exposure to the sector are a fine play. Two funds that I particularly like are

PowerShares QQQ

(QQQQ)

and

iShares Dow Jones US Technology Fund

(IYW) - Get Report

.

While the Q's and IYW are good options for investors looking for buy-and-hold exposure to tech, a good bet for more active investors could be to focus on the parts of the tech sector that will be strong in the near future.

As evidenced by Oracle's earnings, software is one subsector that I believe will do well going forward. The ETF that provides targeted exposure to this segment of the tech sector is

iShares S&P North American Technology-Software Index ETF

(IGV) - Get Report

.

IGV has been on a run lately while other sub-sectors of tech have faltered. For example, ETFs providing exposure to the semiconductor sector

iShares S&P North American Technology-Semiconductors Index

(IGW)

and

SPDR S&P Semiconductor ETF

(XSD) - Get Report

which are both down approximately 7% in the past three months.

IGV, on the other hand, is doing well compared to the broader U.S. equity markets. For instance, IGV is outperforming the

S&P 500

by wide margins year to date and also in the trailing one-month period.

Year to date, the fund has gone up by 11%, including a 14% increase in the past month. In comparison,

SPDR S&P 500

(SPY) - Get Report

has increased by 2% year to date and by 4% in the trailing one month period.

In addition to ORCL, the fund's top 10 holdings of the fund include companies such as

Adobe Systems

(ADBE) - Get Report

,

Symantec

(SYMC) - Get Report

and

McAfee

(MFE)

.

Investors interested in the equity of the software sub-sector of the tech industry also have a mutual fund option at their disposal.

Fidelity Select Software and Computer Services Portfolio

(FSCSX) - Get Report

has some overlapping holdings with the ETFs mentioned above, such as

Microsoft

(MSFT) - Get Report

and ORCL.

Also, the ETF and the mutual fund devote a bit less than 60% of net assets to their top 10 holdings and overall have slightly more than 50 holdings in their portfolios.

Despite the similarities, one important difference for investors is that the mutual fund provides exposure to computer services companies. Within FSCSX's portfolio is

Google

(GOOG) - Get Report

and

eBay

(EBAY) - Get Report

. These companies are not found among IGV's components.

This broader exposure and active management of FSCSX may appeal to more conservative investors. From a performance perspective though, FSCSX has also been strong, as the mutual fund in the past year to Aug. 31 has gone up by 13%.

In general, the technology sector remains a promising region of the market. However, there are specific regions of the market which I feel will perform better than others. Software is one of the regions that I think will hold promise. Investors can choose either FSCSX or IGV based on whichever will be a better personal fit for them.

-- Written by Don Dion in Williamstown, Mass.

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At the time of publication, Dion Money Management was long PowerShares QQQ and Fidelity Select Software and Computer Services Portfolio.

Don Dion is president and founder of

Dion Money Management

, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.