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How to ride the tech rally

Is it the beginning of a bull market? ROB CARRICK shows some of the many ways to play the volatile sector

It was hardly more than a few months ago that thinking about buying technology stocks was like scoping out vacation spots in Iraq or Liberia.

Now, tech is the hottest thing going.

The Nasdaq Stock Market is up about 30 per cent this year and our own S&P/TSX Capped Information Technology Index has gained about the same. Tech funds have surged as well, many of them delivering year-to-date gains of as much as 33 per cent.

One of the great things about the technology sector is the amazing number of ways you can play it. In addition to tech funds, there's a profusion of exchange-traded funds that includes the grand-daddy of them all, the Nasdaq 100 Index Tracking Stock, known as cubes.

But before we look in detail at these options, there's a huge question that has to be addressed. Given that tech has come so far, so fast, should you even bother to buy in at this point?

This is a totally personal decision, so don't expect a recommendation to jump in or avoid tech at all costs. Instead, let's hear what some technology fund managers think about the sector.

"There are some interesting counter-balancing arguments here," said Duncan Stewart, manager of the $72.4-million StrategicNova Canadian Technology Fund.

"The argument that Nasdaq is up 50 per cent [from its October low] and everything is done makes a lot of sense. The argument, on the other hand, that Nasdaq is down two-thirds from where it was [in March of 2000] also makes sense."

One reason to be optimistic can be found in technical analysis of the Nasdaq, Mr. Stewart said. Charts tracking the index's price and volume moves of late suggest it will head to 2,000 from its current level of 1,733.

More importantly, technology companies of all types seem to be recovering from the mauling they took in the past couple of years. Mr. Stewart said the telecom sector has steadied after some horrendous years, while semiconductor companies have an improving outlook and momentum is building in the biotech sector because of a surge in the number of products approved by the U.S. Food and Drug Administration.

"Across the board, there are signs of stability, if not strength," he said.

Investment dealer Merrill Lynch offered a more jaundiced view of technology this week in one of its daily memos to clients. Under a headline reading "Is the Nasdaq rally for real?" the firm ticked off a series of statistical milestones that suggest a market that has got ahead of itself.

Examples: All but 11 of the stocks in the Nasdaq 100 index are up year-to-date, and about two in three have exceeded the S&P 500 index's advance of more than 14 per cent this year.

"Half of the Top 10 winners this year lost money in Q1 and in all of 2002," Merrill noted. "Is it really a good thing to have excitement replace nervousness this quickly?"

The risk in buying tech now is that the rally collapses into a rout -- something that has happened several times before during the bear market. Yet there's a view out there that Nasdaq is on a firmer footing now than it has been for a while.

One reason is the expectation of an economic recovery in the United States, and a belief that there's pent-up demand for technology products and services.

"We expect, certainly in the first half of an economy recovery, for technology stocks to not only show outsized gains, but to warrant them because of the way their businesses are improving relative to other sectors in the economy," said Bill Keithler, who runs $3.6-billion (U.S.) in technology stocks for Invesco Funds Group in Denver, including several mutual funds for the AIM-Trimark family here in Canada.

Game for tech? The easiest way to play is to buy a science and technology fund.

Ironically, several fund companies have been rationalizing their lineup of tech and telecommunications funds lately. Still, most of the major families still have something to offer.

Suzane Abboud, president of the analysis firm FundScope, said the difficulty in choosing a tech fund is that there's little data available to separate the good funds from the bad.

"Ninety per cent of the funds have a track record of less than five years and we have not seen their performance over a full market cycle," she said.

The accompanying chart shows Ms. Abboud's top choices for funds in terms of performance, risk and cost. She said the most interesting fund of the bunch is GGOF Global Technology Classic, which combines below-average volatility with superior returns.

Funds with similar attributes include TD Entertainment & Communications and Franklin World Telecom.

One thing to watch out for in assessing most tech funds -- and ETFs, for that matter -- is the impact of the strong appreciation of the Canadian dollar this year against the U.S. buck. This explains why the gains on most tech funds aren't anywhere near those you keep reading about for the major tech stock indexes.

The appeal of ETFs versus tech funds comes down to a more varied selection and greater flexibility as an investment tool. ETFs are index funds that are listed on stock exchanges, so you'll need a brokerage account to buy them.

Here's a look at some of the more widely held tech ETFs.

Cubes (QQQ-Amex). A quick and easy way to play the Nasdaq 100 index, which comprises the largest non-financial Nasdaq stocks by market capitalization. Cubes have an amazingly low management expense ratio of 0.2 per cent, which means your returns will closely match those of the Nasdaq 100.

The iShares Nasdaq Biotechnology ETF (IBB-Amex). Tracks the Nasdaq Biotech Index, which means you'll get exposure to such stocks as Amgen, Biogen, Gilead Sciences and MedImmune. The MER is quite reasonable at 0.5 per cent.

The iUnits S&P/TSX Canadian Information Technology Index Fund, or iIT (XIT-TSX). A homegrown tech ETF that offers exposure to 17 Canadian technology companies, including Nortel Networks (23.8 per cent of the fund), Celestica, Cognos and ATI Technologies. The MER is 0.55 per cent.

Poke around the Web site of the American Stock Exchange at and you'll find many more ETF choices that focus on narrower tech indexes, including those in areas such as networking, semiconductors, software and telecommunications.

If you like the idea of investing in a tech index but don't want to use ETFs, then consider the Nasdaq 100 index funds available from fund families such as BMO Mutual Investments, CIBC Securities and TD Asset Management.

ETFs are for both tech bulls and bears, by the way. Because you can sell these securities short, you can use them to bet on a coming correction in the technology sector.

You can also use options strategies with ETFs.

If you were a tech skeptic, for example, you could buy QQQ put options. A bullish strategy suggested by the authors of the Break Out Report newsletter ( is to use call options to profit from a rise in the price of cubes over the next couple of years.

To do this, you'd need to buy Long-Term Equity AnticiPation Securities, or LEAPs, which trade on the Amex (try the Amex Web site for more info on LEAPs).

Some investors are going to size up the 50-per-cent-plus gains of the Nasdaq since its October low and take a pass. That's a sensible response, given what happened the last time tech stocks soared.

Just remember one thing, though.

When tech stocks make a move, it tends to be outsized. Will it be that way this time?

"Yes," says tech fund manager Duncan Stewart. "The phrase I've always used about the Nasdaq is, why react when you can over-react?"

Top tech funds

Here's a list of science and technology mutual funds that score well in the ranking system used by analysis firm FundScope.


Fund                                 rating     rating    rating

GGOF Global Tech. Classic             ****        ***      ****

TD Entertainment & Communications    *****       ****       ***

Maritime Life Trimark Discovery-R      ***        ***      ****

Franklin World Telecom                ****       ****       ***

CIBC Nasdaq Index RRSP                 ***        ***     *****

Mercure Technology Index 100           ***       ****       ***

BMO Global Science and Technology     ****       ****      ****

BMO RSP Global Science & Technology   ****       ****      ****

                                    Composite            Three   Three

                                      rating     MER     months  years

GGOF Global Tech. Classic             ****     +2.32%   +22.33%  -28.16%

TD Entertainment & Communications     ****     +2.75    +14.29   -15.72

Maritime Life Trimark Discovery-R      ***     +2.60    +13.81   -31.34

Franklin World Telecom                 ***     +2.78    +10.30   -28.69

CIBC Nasdaq Index RRSP                ****     +1.12     +9.13   -31.75

Mercure Technology Index 100           ***     +2.75     +8.95   -32.24

BMO Global Science and Technology     ****     +2.40     +4.72   -26.81

BMO RSP Global Science & Technology   ****     +2.45     +4.62   -27.08


© 2007 The Globe and Mail. All rights reserved.

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