As exchange-traded funds grow in popularity, the providers face a bigobstacle when they're issuing new ETFs: making sure the new ETFs actually offer something new.

For instance, big-cap tech has many broad-based ETFs, and they almost allhave very similar holdings. In fact, Microsoft ( MSFT) and Intel ( INTC) are the largest holdings of every broad-based tech ETF except for one, the streetTracks Morgan Stanley Technology ETF ( MTK), which is benchmarked to the Morgan Stanley Technology Index (MSH).

Furthermore, all of the other broad-based tech ETFs are mega-cap focused, with very large weightings in IBM ( IBM), Cisco ( CSCO) and Dell ( DELL), in addition toMicrosoft and Intel.

  • Tech Sector SPDR (XLK) MSFT 12.23% INTC 7.26%
  • iShares Dow Jones Tech (IYW) MSFT 12.94% INTC 7.96%
  • iShares Goldman Tech (IGM) MSFT 8.29% INTC 6.95%
  • iShares S+P Global Tech (IXN) MSFT 10.13% INTC 6.41%
  • Vanguard Tech VIPERS (VGT) MSFT 11.89% INTC 7.93%

MTK has much less concentration in those two bellwhethers than its peers,Intel is No. 10 at 3%, and Microsoft is No. 15, at 2.8%.

    1) Google ( GOOG), 5.61%
    2) Broadcom ( BRCM), 4.06%
    3) Nvidia ( NVDA), 3.74%
    4) Motorola ( MOT), 3.71%
    5) Hewlett Packard ( HPQ), 3.71%
    6) Texas Instruments ( TXN), 3.64%
    7 ) Intuit ( INTU), 3.26%
    8) Amazon.com ( AMZN), 3.13%
    9) Yahoo! ( YHOO), 3.06%
    10) Intel, 3%

The unique composition offers MTK a couple of advantages, including moreconsumer exposure through its Internet holdings, which creates broaderexposure within the sector, less single-stock risk and a smaller average market cap than XLK ($56 billion for MTK vs. $68 billion for XLK).

A couple of months ago I wrote an article about the lag of mega-cap tech stocks making the risk/rewardgenerally unattractive. It makes sense to think that the mega-caps willrotate into favor at some point. But until then, MTK offers a way to access the technology sector without the single-stock risk inherent in all theother tech ETFs.

Depth Creates Chop

Of course, the unique composition creates some issues, too. Because of its companies selected and the number of holdings (35), investors should expectmore volatility from MTK than the other tech ETFs.

StreetTracks Morgan Stanley Technology ETF (MTK:Amex)
Large number of holdings can add to volatility
Source: Roger Nusbaum, Your Source Financial

Over the last two years, MTK has had a tight correlation to volume leader XLK, but it has started to pull away, thanks to its exposure to Google andBroadcom.

The one-year chart shows that MTK lags slightly in downturns andoutperforms during upturns. Over the last year, a mediocre year for the sector, MTK has outperformed the second-best-performing ETF, the VanguardTechnology VIPERS, by 110 basis points.

The MTK Outperforms
It beats Vanguard's tech VIPERs
Source: Roger Nusbaum, Your Source Financial

Given that MTK has shown itself to be more volatile, it might be a tougher hold for some investors.

I'm not a fan of Microsoft, but many investors feel an emotionalattachment. So in acknowledging this need, an investor wanting equal weight(15% of the S&P 500) exposure to the sector without a lot of relative volatility could own 9% in MTK, 3% in Microsoft and 3% in iSharesTaiwan ( EWT), which has held in nicely since I wrote about it on Oct. 6, given the strengthof the U.S. dollar.

The above allocation is not the most conservative path an investor can takein the tech sector, let's be clear about that. But it offers ETF investors who have a higher tolerance for volatility a blend within the sector. And it offers a smaller market cap with foreign exposure, which has a good shot tooutperform over longer periods of time.

The bullish case for tech right now includes the fact that growth has lagged value for a while, and tech has not had much of its usualleadership role in a long time. Also, there has been a lot of innovation inthe sector the past couple of years, and there's visibility for more, which may not be adequately priced in across the entire sector. The downside is poorvisibility for corporate spending, and the market punishes stocks that havebad news.

At the time of publication, Nusbaum was long MTK, IYW and Dell, although positions may change at any time.

Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, Ariz., and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback; click here to send him an email.

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