(MENAFN - Arab News) 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, health care 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.
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.
- The author is a Reuters columnist and the opinions expressed are his own.