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Software ETFs

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Average returns in this Category	3 months return	6 months return	12 months return	YTD return

Software	13.43%	46.66%	-0.64%	37.22%

Ticker SPY	Name	3 months return	6 months return	12 months return	YTD return

IGV	iShares Goldman Sachs Software Index Fund	11.57%	45.32%	-8.59%	35.35%

PSJ	Powershares Dynamic Software Portfolio ETF	13.92%	49.41%	9.26%	42.67%

SWH	Software HOLDRS ETF	14.8%	45.26%	-2.58%	33.64%


	About Software ETFs
Technology (Software) ETFs Overview and forecast Software, as an investment, is like other tech sectors. The products come and go, have a period of popularity and high returns, and are replaced. If only investment were that simple. The performance of software companies is an accumulation of their products, which can range from the sublime to the truly ridiculous. The Software ETFs have been through a decline since September 2008 through to March 2009, with a low bounce in November 2008. Charts are showing some return over the last 3 months, but the Software ETFs haven't been doing anything remarkable in terms of market performance. Quite the opposite, their performance has been pretty unimpressive. Bearing in mind that the Software ETFs include holdings in some of the biggest companies on Earth, like Google, Microsoft and Adobe, and that market share for these companies is so huge, you'd expect some high performance. That hasn't happened, and the domestic consumer economy is the main reason. These companies are deeply rooted in the consumer market, and what hurts that market hurts them, both directly and indirectly. The performance of Microsoft is a case in point. This is an index leader which has gone from $30 in May 2008 to $15 in early March 2009 and has managed to crawl back up to $20-ish by early April 2009. Bearing in mind the weighting of assets, it means that any ETF with a lot of Microsoft stock would have taken a 50% loss in asset value to the extent of the weighting with Microsoft. If 20% of the holdings were Microsoft, their value would be half what it was at purchase valuation, on that performance. That's the problem with the Software ETFs. In good markets, these stocks can perform very well, but in weak markets, they don't even try. Short term (6 months) The software stocks, however, do make good trading stocks. That does translate through to the Software ETFs. These include some of the most highly traded stocks in history, and the big volumes do sometimes add a healthy boost to investment funds. ETFs, as exchange traded entities, can benefit greatly from this behavior. In the short term, the question is really when the domestic consumer market is going to dust itself off and get back on its feet. At present, that's not even a conjectural position, but short term speculation and some position buying will probably see the Software ETFs through to modest gains. Medium term (2 years) In the longer terms, the outlook is definitely much more positive. The ETFs are evolving, and as the market picks up momentum, their performance, and their investment potential will develop, both in terms of values for existing products but also new products. Software ETFs are relatively new players as investment vehicles, but as capital investments, they make a lot of sense as an emerging secondary market, as well as a good investment methodology. The market crash has set back the development of the tech stock ETFs, in which Software ETFs will naturally play a large role. You can assume, that unless any further big shocks occur, that the Software ETFs will prosper, and that there will be more funds on the market. Long term (5 years) The long term view for the Software ETFs , despite their drab performance during the market crash, is very positive. Their holdings are strong companies, with strong assets, and really, unless one of the big software companies really falls to bits, there aren't too many weak points in the Software ETFs portfolios. Effectively, if the usual post crash scenario eventuates, the Software ETFs, holding a lot of major stocks, should benefit instantly as the economy turns right side up. Being in lock step with the domestic consumer economy also means investors will be able to read the signs pretty well, so the ETFs should respond well. Qualifiers to projections There are, however, question marks over the specific performance of companies, notably Microsoft, post Vista. This is an Achilles' Heel for the Software ETFs, where asset values can be effectively sabotaged by the aberrations of dysfunctional stocks. The software sector is prone to producing a few turkeys instead of golden eggs, and the sound of investors' teeth grinding isn't entirely unknown under these conditions. Software isn't risk free as an investment. Many major software firms have been fried in the media for their security problems, poor quality products, and other real problems which can seriously affect sales. Underperforming products can do real damage, even to giant corporations. They can also put some real holes in corporate bottom lines, and sink stock prices very effectively. Investors are advised to stay alert, and be alarmed whenever the mood strikes them.

Last Updated on: 2010-01-14 02:03:40

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