Harvest time for high-tech funds

By Tim Middleton

The snap of autumn is in the air, and the season is bringing its usual harvest of apples, pumpkins and high-technology profits.

This volatile sector is ahead a rousing 19% this year as of Oct. 3, and it's just now entering its strongest season. Technology investors earn average profits of 6.8% in October and a further 6.9% in November, the bulk of the gains for most entire years.

"In the fourth quarter you get the budget flush from enterprises and the consumer holiday spending binge," notes Tara Hedlund, co-manager of Turner New Enterprise Fund (TBTBX).

October is when tech firms alert Wall Street to their last-minute corporate and consumer orders, and this year is shaping up as a very successful one.

BlackBerry maker Research in Motion (RIMM, news, msgs) last week reported a doubling of third-quarter profit and projected that the number of subscribers to its service would leap by 19% in the fourth quarter as the company expands its global reach, particularly in Latin America.

So at a minimum, tech offers an excellent trading opportunity. Over the winter, the sector usually hibernates. But lately tech, along with other high-growth corners of the market, has been stretching its legs. Over the last five years, the average tech-sector fund has delivered annualized returns of 21.1%, about 35% more than the S&P 500 Index ($INX).

Long-term tech investors interested in boosting their exposure to tech can find plenty of inviting homes for their money. Turner New Enterprise is particularly outstanding.

Trading the Cubes

Traders are better off in exchange-traded funds, which come without mutual-fund strings like redemption fees. (Though, because they trade like stocks, they do involve brokerage commissions.)

You can look as hard as you want, but you'll find no better ETF choice than the Cubes. Good old QQQ, with a new name and ticker symbol, is now PowerShares QQQ (QQQQ, news, msgs). Those four letters signify Nasdaq stocks -- only NYSE and Amex stocks have symbols of three letters or fewer. Four letters are a status symbol in Silicon Valley, embraced by the fastest-growing technology companies, and they're the ones you want to own.

In the 1990s, technology was what you might call a "permasector," an area of the market guaranteed to beat the broad indexes year after year. That bubble burst in 2000, but the group is asserting itself again. Most of us consume more technology today than we did in 1999, from our souped-up cell phones to our slimmed-down laptops and TVs.

Turner New Enterprise has been perfectly aligned with this renaissance. A compact portfolio of around 40 names, Research in Motion is a top holding, as are Apple Computer (AAPL, news, msgs), Broadcom (BRCM, news, msgs), Google (GOOG, news, msgs) and Cisco Systems (CSCO, news, msgs).

"We think valuations are attractive for the sector," Turner New Enterprise's Hedlund says. She says tech companies are growing at a significantly higher rate than the overall market and that competing sectors like finance have taken a drubbing.

"Overall, we think the market is now starting to demonstrate that the growth style of investing is back in favor after value being in favor the last seven years, and that benefits the tech sector," she says.

Among ETFs, the high-tech default is Cubes. And it is a superb tech proxy, up 20% this year as of Oct. 2 and an average of 20.5% in each of the last five.

PowerShares QQQ has 10% of assets in Apple Computer and another 10% in the next two largest holdings, Microsoft (MSFT, news, msgs) and Qualcomm (QCOM, news, msgs). (Microsoft publishes MSN Money.)

For traders, the advantage of a huge fund like QQQ -- with assets of $20.9 billion, it is the third-largest ETF -- is that executions are lickety-split and the bid-ask spread is a penny or less.

The other ETF choices

There are other choices. Aside from funds that cover certain industries, like software and networking, the best ones are Select Sector SPDR -- Technology (XLK, news, msgs), Vanguard Information Technology ETF (VGT, news, msgs) and iShares Dow Jones Technology Index (IYW, news, msgs).

Tech-sector ETFs

	Technology SPDR	Vanguard IT	iShares DJ Tech
Assets	$2.02 billion	$286.9 million	$781.9 million
Expense ratio	0.24%	0.25%	0.48%
Index tracked	Techs in S&P 500	MSCI US Info Tech	DJ US-Tech Index
Performance
Year to date	16.6%	16.2%	16.1%
Three years	12.7%	13.0%	13.2%
Five years	18.4%	n/a	19.4%
Top holdings	Microsoft AT&T Cisco Systems IBM Intel	Microsoft Cisco Systems IBM Intel Hewlett-Packard	Microsoft Cisco Systems IBM Intel Hewlett-Packard
Percent of assets in top 5 names	35%	32%	39%
Number of holdings	83	390	205

Notes: n/a=not applicable; fund lacks five-year record. Totals as of Oct. 3.

Sources: MSN Money, Morningstar, ETFConnect, fund companies

Good as these funds are, however, the Cubes perform better. By excluding older companies that list on the New York Stock Exchange, such as IBM Corp. (IBM, news, msgs), they pack more punch. And although the Nasdaq 100 is not a pure tech index -- a third of assets are in health care and business and consumer services -- it behaves like a tech index, and that's the portfolio role for which it is suited.

I've got a little mad money, and I'm going to toss some of it into Cubes for the next two months and maybe make enough to buy a big-screen TV for Christmas. I've got better odds than my wife gets in the lottery.

At the time of publication, Tim Middleton didn't own any securities mentioned in this article. In accord with MSN Money policy, he won't purchase PowerShares QQQ until three days after this column appears.