Hardware Or Software?

Published on Wednesday, 22 February 2012 20:32 Written by Todd Shriber

New York, February 22^nd (TradersHuddle.com) – It’s a conundrum that many tech investors are faced: What’s the better way to gain exposure to the technology space? Through hardware makers such as Dow components Cisco Systems (NASDAQ: CSCO) and Hewlett-Packard (NYSE: HPQ) or through software giants like Microsoft (NASDAQ: MSFT) and Oracle (NASDAQ: ORCL)? If Apple (NASDAQ: AAPL) is considered a hardware maker, then the answer becomes quite clear, but not everyone had the good fortune to buy Apple when it was $100.

Fortunately, there is an ETF that doesn’t force investors to choose between hardware and software. It’s the iShares Dow Jones U.S. Technology Sector Index Fund (NYSE: IYW). The iShares Dow Jones U.S. Technology Sector Index Fund allocates almost 57% of its weight to hardware companies and the rest goes to software firms.

There are dozens upon dozens of tech ETFs and distinguishing between the ones that focus on large-cap stocks is a tedious task. However, IYW has one primary advantage investors are sure to like, at least in the current environment. Apple is by the ETF’s largest holding with a weight of 19.25%. Combine the ETF’s allocations to Microsoft and International Business Machines (NYSE: IBM) and Apple still outweighs those two old school tech titans.

Overall, IYW’s top-10 holdings account for over two-thirds of the fund’s weight. That’s a lot under any circumstances, but especially when noting IYW is home to almost 160 stocks. Back to Apple. Many folks probably think the ETF that has the largest allocation to Apple is the PowerShares QQQ (NASDAQ: QQQ) or the Technology Select Sector SPDR (NYSE: XLK), but IYW beats both of them when it comes to Apple exposure.

That bigger weight to Apple is probably the reason why IYW has outperformed QQQ and XLK year-to-date. There’s another advantage to IYW’s arguably excessive weight to Apple. It keeps the ETF’s returns from being dragged down by a host of other dead money stocks that are littered throughout the fund.

Cisco, HP, Dell (NASDAQ: DELL) and plenty of others have arguably seen their best days come and go. Hey, if this was the late 1990s, IYW would be great. It’s not and it’s a good thing the ETF is top heavy with the big-cap tech names, which can actually generate alpha for their investors. Google (NASDAQ: GOOG), Intel (NASDAQ: INTC) and Qualcomm (NASDAQ: QCOM) are also top-10 holdings in IYW.

Maybe the ultimate tech-investing question isn’t hardware or software, but how much Apple exposure can you get through an ETF?

The vitals: IYW has $1.5 billion in assets under management and an expense ratio of 0.47%. That makes the iShares offering more than twice as expensive as QQQ and XLK.