XLK Technology Select Sector

The technology sector, which missed out on all the fun in the first half of the year, turned around in the third quarter earnings season with impressive growth rates and beat ratios. Thanks to improving developed economies and revived emerging nations, the sector is back on track.
 
Though broad tech is delivering handsome returns to investors in the year-to-date time frame, Internet is leading the way driven by improving fundamentals, impressive outlooks, and broad investor interest (read: The Incredible Run for NFLX Puts These ETFs in Focus).
 
Strong performances from some major companies like Netflix (NFLX), Google (GOOG), Yahoo (YHOO), Facebook (FB) and Amazon (AMZN), also support the bullish trend in the space. Further, four of the six Zacks Industries that are classified as being in the Internet space have positive outlooks, suggesting busy trading for this segment in the coming months.
 
Given the positive trends in the Internet space, a good way to seek entry into the broad tech world is by tilting toward ETFs in this segment. While there are a number of ways to invest in this surging corner of the market, a look at the top ranked ETF with a lower level of risk could be a good idea (read: 3 Internet ETFs Leading the Tech World Higher).
 
One way to find a top ranked ETF in the tech space is by using the Zacks ETF Ranking system.
 
About the Zacks ETF Rank
 
A look at the top ranked Internet ETFs can be done by using the Zacks ETF Rank. This technique provides a recommendation for the ETF in the context of our outlook on the underlying industry, sector, style box or asset class. Our proprietary methodology also takes into account the risk preferences of investors.
 
The aim of our model is to select the best ETFs within each risk category. We assign each ETF one of five ranks within each risk bucket. Thus, the Zacks Rank reflects the expected return of an ETF relative to other ETFs with a similar level of risk.
 
Using this strategy, we have found one ETF – First Trust Dow Jones Internet Index (FDN) – in the space that has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with a ‘Medium’ risk outlook (read: all the Top Ranked ETFs). The details are highlighted below:
 
FDN in Focus
 
This ETF offers exposure to the Internet segment of the broad tech sector by tracking the Dow Jones Internet Composite Index. The benchmark measures the performance of the companies that primarily earn half of their annual revenues from Internet business and have a trading history of at least three months.
 
In total, the fund holds a small basket of 41 securities, with Google as the top firm with 11.19% of assets. Amazon and Facebook occupy the next two positions at 8.74% and 6.68%, respectively.

This suggests that the fund is largely concentrated on its top 10 holdings, which dominate the fund’s return. Meanwhile large cap accounts for 56% of the assets, mid (27%) and small (17%) caps take the remainder of the basket (read: Internet ETFs in Focus on Amazon Sales Beat).
 
However, the product has a certain tilt toward growth stocks, as these account for three-fourths of the portfolio which could be considered beneficial for this fund. This is because growth investing can be thought of as a momentum play, which makes it a great strategy in a trending market (i.e. a market characterized by a prolonged uptrend).
 
Stocks in the growth ETF portfolio harness their momentum in earnings to create a positive bias in the market, resulting in rocketing share prices. This is especially true given the securities included in the fund’s portfolio are enjoying a huge rally this year, thereby raising the price for FDN.
 
From a sector look, Internet and mobile segments account for more than half the portfolio, followed closely by Internet retail at 24% of assets. The rest of the portfolio provides a nice mix in a variety of related industries including software, communications and asset management.
 
Last but not least, FDN is among the most popular and liquid ETFs in the broad tech space with AUM of over $1.7 billion and average daily volume of more than 250,000 shares. This suggests that bid ask spreads are tight and that total costs may not come in much higher than the 57 bps expense ratio.
 
In terms of performance, the ETF added nearly 42% year-to-date, easily crushing the broad tech fund (XLK) and U.S. market fund (SPY) by wide margins (see: all the Technology ETFs here).
 
Further, the ETF is up about 49% over the trailing one-year period and 62% over the past two years.
 
Bottom Line
 
This ETF has delivered solid returns not only this year, but also over the long term. This trend is expected to continue given a string of earnings beats and rising IT consumer spending.
 
So, investors looking for tech ETFs should consider FDN for their exposure, as it is a top rated ETF that is poised to lead the way higher in the coming months.
 
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FT-DJ INTRNT IX (FDN): ETF Research Reports
 
GOOGLE INC-CL A (GOOG): Free Stock Analysis Report
 
NETFLIX INC (NFLX): Free Stock Analysis Report
 
SPDR-TECH SELS (XLK): ETF Research Reports
 
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