3 ETF Plays For Technology Growth Stocks Flying Under The Radar

by on November 14, 2012 | ETFs Mentioned:

The persistently low interest rate environment has prompted countless investors to beef up exposure to dividend-paying securities in an effort to outpace inflation and lock in income amid a largely uncertain economic landscape. But that’s just the more talked about half of the story; on the other end of the spectrum are optimists who are taking advantage of looming fears on Wall Street and buying into high growth opportunities that are flying under the radar for many [see also 101 ETF Lessons Every Financial Advisor Should Learn].

For those eager to seek out attractive upside potential in the market in lieu of chasing after well-known dividend-paying stocks, the Forbes Fast Tech 25 List is a great starting point. Each year Forbes compiles a list of the 25 fastest-growing technology companies, profiling firms with solid financial standings and sales growth of at least 10% for each of the past three fiscal years and over the last 12 months [see High Tech ETFdb Portfolio].

Running down the list, investors are sure to run into several bellwethers that make frequent appearances in the headlines, including Apple (AAPL), LinkedIn (LNKD) and Red Hat (RHT). Digging deeper, however, a number of lesser-known tech firms also make the rankings, and often the lesser known opportunities turn out to be the most profitable ones [try our Free ETF Stock Exposure Tool].

Below we highlight three ETFs that make significant allocations to several of the lesser-known firms profiled in the Forbes Fast Tech 25 List:

PowerShares Nasdaq Internet Portfolio (PNQI)

This ETF, which is designed to track the performance of the largest and most liquid U.S. companies engaged in internet-related businesses, features three of the 25 fastest growing tech stocks in its top ten holdings. The biggest allocation goes to Rackspace Hosting, Inc. (RAX) at about 4% of total assets; this firm offers a portfolio of cloud computing services, catering to companies of all sizes and across more than 120 countries. Equinix, Inc. (EQIX) and VeriSign, Inc. (VRSN) are also top holdings in PNQI; these companies offer high performance data centers to businesses around the globe and domain registry and infrastructure assurance services, respectively [see also Hyper-Targeted Tech ETFs]. 

First Trust ISE Cloud Computing Index Fund (SKYY)

This fund is an equal-weighted portfolio of companies actively involved in the booming cloud computing industry and a number of its top holdings are featured in the Forbes Fast Tech 25 List. Aruba Networks, Inc. (ARUN) takes the number one spot and accounts for nearly 5% of total assets; this firm provides next-generation network services, connecting local and remote users to corporate information technology resources via enterprise networks. SKYY also features Rackspace Hosting and Equinix in its top ten holdings, along with well-known industry giants like Google (GOOG) and Amazon.com (AMZN). 

First Trust Technology AlphaDEX Fund (FXL)

This FirstTrust offering applies the AlphaDEX stock selection methodology to identify the most “fundamentally-sound” growth tech companies from the Russell 1000 Index; the resulting portfolio includes several high-growth candidate from the Forbes list and, as a whole, is very well-balanced compared to other ETFs covering the Technology Equities space. Featured as number 12 on the Forbes rankings, SolarWinds, Inc. (SWI) is the number one holding in FXL, however, it receives just under 2.5% of total assets given the fund’s balanced weighting methodology. This company develops, sells and supports enterprise IT infrastructure management software to organizations of all sizes [see ETF Picks For 3 of America's Best Small Companies]. 

Investors can also find Equinix and Apple in the top ten holdings of FXL, although it’s worth noting that each of these account for a fairly equal portion of the total assets, thereby potentially reducing the company-specific risk associated with this product; by comparison, Apple accounts for as much as 20% of total assets in a number of ETFs that follow the traditional, market cap-weighted methodology. 

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Disclosure: No positions at time of writing.