3 ETFs to Cash In on Tech Spending Boost

NEW YORK (TheStreet) -- As technology giants report strong earnings and robust sales guidance, exchange-traded funds which track the technology sector are poised for growth and could pose an opportunity.

As the U.S. economy starts to stabilize, businesses are expected to upgrade software and hardware, which were one of the first things to be postponed during the "Great Recession" as cost-cutting efforts took precedent. According to market researcher IDC, sales of hardware are expected to rise by 6.4% and sales of software and technology are expected to jump 3% this year as firms upgrade servers, workstations, networking gear and storage systems.

To further boost appeal, increases in global personal computer sales will help bolster revenue. Shipments of PCs are expected to rise 22% this year as many buyers bypassed Windows Vista and demand in emerging markets, fueled by an increase in personal wealth, is ballooning.

This increased demand will likely make Microsoft ( MSFT) a clear winner as the company has already sold nearly 150 million copies of Windows 7 since its debut and the software is expected to be found on nearly nine in every 10 personal computers around the world.

Other companies likely to reap the benefits of robust guidance in the technology sector include Oracle ( ORCL), which recently acquired server manufacturer Sun Microsystems, and the world's third-largest PC maker, Dell ( DELL). The Austin, Texas-based company is anticipating revenue to rise by 19% in 2010.

In addition to increased revenue and sales growth, the fundamentals of the technology sector remain strong. The sector as a whole has a healthy balance sheet with excessive cash reserves and boasts a five-year price/earnings to growth ratio of 1.1 which indicates that the value on the expected growth of the sector is prevalent.

Some ETFs influenced by these trends include the following:
  • Technology Select Sector SPDR (XLK), which give exposure to Microsoft, Oracle and Dell. XLK closed at $21.15 on Wednesday.
  • Software HOLDRs (SWH), which allocates 19.74% of its assets to SAP (SAP), which is expected to witness sales growth of 7%, 18.94% of its assets to Microsoft and 14.10% to Oracle. SWH closed at $38.01 on Wednesday.
  • iShares Dow Jones US Technology (IYW), which gives exposure to Microsoft, Oracle and Dell. IYW closed at $53.58 on Wednesday.

Although an opportunity exists in the technology sector, it is equally important to keep in mind the inherent risks involved with investing in the sector. To help protect against these risks, the use of an exit strategy which identifies specific price points at which downward price pressure is likely to be eminent is important.

According to the latest data at SmartStops.net, these price points are as follows: XLK at $20.24, SWH at $36.73 and IYW at $51.11.

Written by Kevin Grewal in Houston.

At the time of publication, Grewal was long IYW.

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Kevin Grewal serves as the editorial director and research analyst at The ETF Institute, which is the only independent organization providing financial professionals with certification, education, and training pertaining to exchange-traded funds (ETFs). Additionally, he serves as the editorial director at SmartStops.net where he focuses on mitigating risks and implementing exit strategies to preserve equity. Prior to this, Grewal was an analyst at a small hedge fund where he constructed portfolios dealing with stock lending, exchange-traded funds, arbitrage mechanisms and alternative investments. He is an expert at dealing with ETFs and holds a bachelor's degree from the University of California along with a MBA from the California State University, Fullerton.

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