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What Lies Ahead for Technology ETFs?

What Lies Ahead for Technology ETFs?                                    

December 23, 2008

By Ron DeLegge, Editor                                  

SAN DIEGO (ETFguide.com) - Once upon a time, technology was the sort of industry sector you could throw money at and win every hand. Remember the good old days when $50 stocks, in just a matter of weeks, would zoom to $250? Unfortunately for tech, the days of easy money are long gone.

S&P technology stocks (NYSEArca: XLK) are one of the worst performing groups within the S&P 500, not far behind the dreaded financials (NYSEArca: XLF). 

XLK consists of 79 leading technology stocks. AT&T (11.29%), Microsoft (9.99%), and IBM (7.50%) are the top three holdings with the highest index weighting. According to AltaVista Research, S&P technology stocks carry a P/E ratio of just 11.4, which is nearly the same for the broader S&P 500. Technology shares have typically traded at a healthy premium to the market, but not anymore. Put another way, technology is on sale. 

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Illustrating the industry-wide slump in positive earnings, virtually all technology subsectors have experienced poor performance in 2008. Shares in Internet (NYSEArca: FDM), Software (NYSEArca: IGV), semiconductors (NYSEArca: XSD), hardware/networking (NYSEArca: IGN) and telecommunications (NYSEArca: VOX) are all down between 40 to 50%.  

As gloomy as things may seem, don't be tricked into believing everyone's losing money. A tiny population of investors that were smart enough to own the right technology ETFs have been rewarded.

Since we featured the UltraShort Semiconductors ProShares (NYSEArca: SSG) and the UltraShort Technology ProShares (NYSEArca: REW) in our November ETF Profit Strategy Newsletter, SSG climbed 55.74% and REW jumped 70.45%. Both short ETFs use leverage and are designed to increase in value when the stock benchmarks they track fall.

Thus far, technology stocks have yet to demonstrate any market performance leadership. We also see big problems ahead for certain industry groups in 2009. For example, the week of November 13th we warned our newsletter readers about the danger of being tempted by XLF's 5.45% annual dividend yield. At the time, XLF was trading at $13.32 and has since fallen around 12% in value. Anybody that bought XLF would've seen their yield wiped out by two times!

One other tip pertains to investing in the technology sector and is aimed at stock pickers. The best course of action, in our view, is to only invest in individual stocks after you've laid the foundation of your investment portfolio to a broad mix of low cost diversified index ETFs. Not doing this is like trying to remodel your home's attic before you've built the structure's foundation. Insanity!

Since many of you refuse to heed this good advice, it's crucial that you monitor the performance of your individual tech stocks versus their corresponding technology ETFs. This is the correct reference point to use because you want to gauge how your stocks are performing versus a group of their peers. Simply stating "I'm doing good" or "I'm doing bad" is neither a logical nor proper reference point.

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Many investors will be surprised to learn that leading technology stocks like Intel (NasdaqGS: INTC), Dell Computer (NasdaqGS: DELL), Electronic Arts (NasdaqGS: ERTS), Texas Instruments (NYSE: TXN), and many others have each underperformed S&P Technology stocks (XLK) over the past 5-years and running. What does this prove?

Contrary to the inaccurate conclusions perpetrated by Wall Street's self-congratulatory bunch, this does not prove that you need to pick your stocks better. Rather, it proves that simply using a sector ETF to get your technology exposure can lead to better results compared to obeying the broken advice of stock pickers like CNBC's Jim Cramer. 

Also, by using the interactive charts available at Yahoo Finance, you can compare the performance of your stocks versus their ETF peers.

What now?

If you're sitting on dead money in a taxable brokerage account, there's still a few more days to take advantage of tax-loss selling. The only thing worse than buying the wrong stock is holding on to it and waiting for a recovery that's not going to happen. 

If technology shares continue to slide in 2009, ETFguide will be among the first places to explain to you the significance of the move and how to profit. May the market indexes be with you. 



 

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