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Even with a series of weaker-than-expected reports raising concern that the U.S. economy is sliding back into recession, there are several economic outposts located far enough from the housing sector to be generating growth on their own. One such region is information technology.
Information technology is one of just two sectors that Standard & Poor’s Equity Strategy recommends investors overweight in their portfolios (the other is consumer staples), due to the start of a new replacement cycle for personal computers, healthy balance sheets, strong exposure to growing emerging markets, and cost cuts implemented during the recession.
S&P Equity Research believes IT companies will report a 49% gain in operating income per share during 2010.
Also, shares of many IT companies are still trading near their lowest price in the past decade. Indeed, valuations appear so compelling that several IT companies have started to make acquisitions recently; Dell and Hewlett-Packard even got into a bidding war over data-storage company 3PAR.
While tech companies of all types are feeling the urge to merge, one tech industry that is enjoying remarkably strong health is the software industry, which is benefitting from stronger corporate spending on software this year compared to 2009.
Small and mid-sized software companies have increased profits “dramatically over the last year,” according to a September 2010 study by the Software & Information Industry Association. Average revenue rose by 15% in 2009 compared with 2008, and 75% of respondents expect even stronger growth in 2010.
“This segment of the software industry has effectively weathered the recession and stands poised for substantial growth in the year ahead,” the study said.
There are three exchange-traded funds, or ETFs, that let investors target the U.S. software industry.
By far, the largest and most actively traded is the iShares S&P North American Technology-Software Index Fund (IGV), which has $281 million in assets and trades about 100,000 shares a day. This fund was formerly known as the iShares Goldman Sachs Software Index Fund, until the index was sold by Goldman to Standard & Poor’s in 2007.
The iShares software ETF was launched in July 2001 amid the meltdown in Internet stocks, and its returns since then have been fairly volatile: It’s had three calendar year losses – in 2002, 2005, and 2008 – and two years of gains topping 45%.
Since inception, IGV has returned an average annual loss of about 1.4%. The fund tracks a modified market-capitalization weighted index, with the largest of its 51 holdings limited to 8.5% of assets and holdings equal to 5% or more of the fund limited to 46% of the fund.
As of early September, the fund’s largest holding was Adobe Systems at 8% of assets. Other holdings accounting for more than 5% of assets include Microsoft, Intuit, Oracle, Salesforce.com, Citrix Systems and Symantec.
The other software ETFs are much smaller and less actively traded.
The PowerShares Dynamic Software Fund (PSJ) and the Merrill Lynch Software HOLDRS (SWH) each have about $60 million in assets and trade about 25,000 shares a day. Otherwise, the two offer very different approaches for investors.