By John Wasik
CHICAGO Dec 3 It's easy to believe in
technology stocks again.
After a dismal recession and sluggish recovery, the sector
is up 13.3 percent this year through Nov. 30, according to
Standard & Poor's, slightly ahead of the broader S&P 500 Index.
Expect that run to continue, since gadget-buying will be strong
this holiday season and may continue into next year.
Yet the question for tech investors is whether Apple Inc
should remain a key holding. The stock already
dominates most tech portfolios because of its mammoth market
capitalization, making it one of the most valuable companies on
the planet. Apple is still the largest holding in the S&P 500
and peaked above $700 a share back in September. It's been
trading below $600 since late October.
I agree with the consensus that Apple's devices will
continue to grab market share, particularly if it can penetrate
China. But that doesn't necessarily mean the stock should
dominate some of the biggest technology exchange-traded funds.
Normally, I would suggest that any technology investor buy a
broad-based fund like the Vanguard Information Technology ETF
or the Technology Select Sector SPDR. The
numbers are fairly good right now: The Vanguard fund is up 13.6
year-to-date through Nov. 30, roughly matching the technology
sector's performance, but lagging four better-performing sectors
-- consumer discretionary, financials, healthcare and telecom
services. The SPDR is up nearly 16 percent over the same period.
Unfortunately, Apple accounts for 20 percent of each of
these funds. That's an uncomfortably large concentration in one
stock, placing market risk on the fortunes of one company. It's
not what I would call safe diversification.
A genuinely broad-based approach would focus less on pricey
mega-caps like Apple and include mid-sized, small- and micro-cap
stocks that have much more upside potential. Instead, investors
should own companies that are leaders in technology that tend to
garner far less attention than Apple, including Cisco Systems
Inc, Oracle Corp and Qualcomm Inc,
which makes the chips often used in smartphones. These should be
staples in any portfolio focusing on technology.
To find a basket of these innovative companies, I'd suggest
the PowerShares S&P SmallCap InfoTech fund, which holds
companies with much lower market valuations and perhaps greater
upside potential. The fund is up about 6 percent. While the
short-term returns of smaller-company funds are lower than of
those that hold mega-caps, over time they may offer a higher
return relative to the amount of risk they are taking.
The Guggenheim S&P Equal-Weighted Technology ETF,
avoids allocation by market capitalization weighting, reducing
your exposure to the most-popular stocks. Up 7.5 percent this
year, the fund offers a broader basket of technology solutions
companies such as Accenture Ltd, Adobe Systems Inc
and Yahoo! Inc.
As with all sectors, the more you bundle a handful of stocks
in single or related industries, the more volatility you add to
your portfolio. Technology, as any investor from the early part
of this century will tell you, had its own meltdown and falls in
and out of favor with large institutions.
IT'S ALL ABOUT THE PLATFORM
Why am I so down on Apple, even though I was an early
adopter of Apple computers back in the last century?
Ultimately, the gadget war will be won by the companies with
the best universal platform or integrated cyber-ecosystem.
What's important over the long term are not individual
innovations in smartphones or cloud computing, but the
connections between the larger universe of information. How they
make businesses and individuals more productive is where the
investment opportunities lie.
Doubtless, Apple will have a place in any portfolio
near-term. Its technology and cult-like devotion will not
evaporate overnight. Just don't wear blinders and neglect other
opportunities. It's far too easy to get bitten by a single
glamor company, especially one with so much global competition.