Undiscovered Tech Play

Published on Thursday, 07 June 2012 21:06 Written by Todd Shriber

When it comes to technology ETFs, the PowerShares QQQ (NASDAQ: QQQ), the Technology Select Sector SPDR (NYSE: XLK) and a few others really dominate the conversation. That’s understandable because not only are QQQ and XLK two of the oldest and largest tech ETFs, but they also offer two of the largest weights to everyone’s favorite stock, Apple (NASDAQ: AAPL).

Investors that own shares of Apple directly or an ETF that is excessively weighted to the stock may want to consider rounding out their tech exposure a fund that takes a more balanced approach to the sector. The First Trust Technology AlphaDEX Fund (NYSE: FXL) is one option to consider.

FXL, which has been around over five years, doesn’t garner the attention that QQQ and XLK do, but this is by no means a small, anonymous ETF. With average daily volume of almost 254,000 shares and assets under management of almost $249.5 million, FXL is a successful ETF by any metric.

Home to 89 stocks, FXL does oblige Apple lovers with a 2.15% weight to the darling stock. That allocation might imply that Apple dwells far down FXL’s holdings list. In fact, the opposite is true. Apple is FXL’s third-largest holding and when an ETF’s third-largest holding gets a weight of just 2.15%, that means it’s a diversified fund. That’s a good thing.

Diversified FXL is as the ETF touches almost all corners of the tech universe. Semiconductor firms represent over 22% of FXL’s weight while software firms garner an allocation north of 18.4%. Instruments and components makers chime in at 17.5% and computer and peripherals makers account for almost 14%.

What makes FXL interesting is it’s weighting methodology. If this were a traditional cap-weighted ETF, Apple would be its largest holding, no questions asked, because Apple is the largest U.S. Company by market value. But FXL doesn’t do that. The fund’s StrataQuant Technology Index ranks the stocks which are members of the Russell 1000 Index on growth factors including three, six and 12-month price appreciation, sales to price and one year sales growth, and, separately, on value factors including book value to price, cash flow to price and return on assets.

In other words, isn’t the most important consideration regarding FXL’s lineup and that can actually expose investors to some positive trends among forgotten or undiscovered tech names. For now though, the ETF has lagged some of its more Apple-heavy rivals and we’re in the midst of some seasonal trends for the tech sector so consider FXL one to watch for a tech resurgence later this year.