Technology Sector Spider
has attracted more than $1 billion in assets, yet among technology indices, it's starting to look like an also-ran.
This exchange-traded fund, which tracks the technology stocks in the
, is older than the
Nasdaq 100 tracking stock
. However, the Tech Sector Spider hasn't achieved the celebrity -- or the assets -- of its younger competitor.
And for good reason.
The Tech Sector Spider costs more to own than the Nasdaq 100 tracking stock -- known as the QQQ -- and dramatically trails it in performance.
This sector fund doesn't deserve complete derision, but it does have its drawbacks.
Standard & Poor's Depositary Receipts
, are index funds that trade on the
American Stock Exchange
and track the benchmark S&P 500 index. There are a variety of types, including one
that tracks the overall benchmark, and nine that track various sectors.
The Sector Spiders started trading on the Amex at the end of 1998. Together, these nine funds comprise all of the companies in the S&P 500 index. Indeed, they were created by
State Street Bank & Trust
as asset-allocation tools that would allow customization of the S&P index.
Despite their intended purpose, it's understandable why some of these sector portfolios aren't selling well. The
Utilities Sector Spider
, for example, is down 10.2% for the last 12 months, compared with a 7.5% rise for the S&P 500. The fund has taken in a paltry $96 million.
By comparison, the Technology Sector Spider commands about $1.3 billion in assets.
That amount sounds awfully impressive until you compare it to the $9.4 billion in the QQQ, which made its debut a few months after the Sector Spiders. (The QQQ celebrated its first anniversary on March 10.)
The QQQ has attracted more money due in part to the fact that futures contracts trade on the underlying index. The availability of related derivatives typically increases volume and interest in the underlying index or stock as those derivatives create an opportunity for different sorts of trades. The futures provide greater liquidity for traders and arbitragers.
For most individual investors, the Tech Spider's biggest weakness shows up in its performance.
Over the past year, the Tech Sector Spider has gained 69.5% -- which looks great until you see the QQQ's climb of 124%.
That obvious performance gap can be blamed on the Tech Spider's next flaw -- not enough emerging tech.
The Tech Sector Spider consists of the 91 tech stocks that are in the S&P 500. The QQQ tracks the Nasdaq 100, an index that consists of the 100 largest nonfinancial stocks on the
The two indices have only 33 stocks in common, though five of their top-10 holdings are the same.
The most obvious reason for the differences: The Nasdaq 100 contains only Nasdaq stocks. This index cannot include stocks that trade on the
New York Stock Exchange
The S&P 500 (and consequently, the Tech Sector Spider) has only two bona fide Internet stocks:
The Nasdaq 100 doesn't have AOL because that stock trades on the New York Stock Exchange. But that index does have Yahoo! and a lot more, including
-- names you won't find in the S&P 500.
Other stocks like fiber-optic equipment maker
and business-to-business services provider
-- which don't show up in the Tech Sector Spider -- have been big contributors to the Nasdaq 100's performance. They're up 999% and 1,374%, respectively, over the past year.
The S&P 500, the parent of the underlying index of the Tech Sector Spider, is meant to represent the broad economy and should include rather diverse industry representation.
The Nasdaq 100 will simply give you more aggressive tech stocks. Remember: Yahoo! was only added to the S&P 500 in December 1999, while it has been in the Nasdaq 100 since September 1998.
As costs, the Tech Sector Spider's annual underlying expenses are 0.56%, while the QQQ charges just 0.18%. (You'll pay brokerage commissions to buy and sell both of these portfolios.)
Expenses on other Sector Spiders are about the same, ranging from 0.56% to 0.58%. But the larger $16.6 billion Spider that tracks the entire S&P 500 index is conspicuously cheaper. Its annual expenses
just fell to 0.12%.
Tech-hungry investors could buy both of these products if they so desired. Given "the fairly low overlap between the two indices, they are not substitutes for one another," says Bill Velasco, a derivatives analyst at
But you might want to wait until the expenses on the Tech Spider come down, a distinct possibility given the
coming onslaught of exchange-traded funds from
Barclays Global Investors
And cheaper is better.
Dear Dagen aims to provide general fund information. Under no circumstances does the information in this column represent a recommendation to buy or sell funds or other securities.