New ETF Eyes Exponential Tech

09/24/2015 9:00 am EST

Focus: STOCKS

Mark Salzinger

Editor and Publisher, The No-Load Fund Investor

This new technology ETF—which has already accumulated more than $600 million in assets—offers a thematic approach to technology, explains Mark Salzinger, editor of The Investor’s ETF Report.

The iShares Exponential Technologies (XT) fund emphasizes groundbreaking applications that will displace predecessor technologies and products or create new market opportunities.

All of its holdings must fit within one of nine broad themes:

1. Big data and metadata analytics.

2. Nanotechnology, which deals with infinitesimal dimensions at the molecular or even atomic level.

3. Medicine and neuroscience, dealing specifically with the nervous system and the brain.

4. Networks and computer systems, focusing on how data is exchanged between devices.

5. Energy and environmental systems, including alternative or renewable energy sources.

6. Robotics.

7. 3-D printing.

8. Bioinformatics, the study of complex biological data.

9. Financial services innovation.

Given the varying nature of each theme, not all of XT’s holdings are what you might think of when you think technology stocks. XT includes both producers and consumers of groundbreaking technology.

While technology (about 31% of assets) is the single largest sector allocation in the portfolio, healthcare is nearly as large (30%).

Global giants are here: XT holds bellwethers IBM (IBM), Verizon (VZ), Lockheed Martin (LMT), Amgen (AMGN), Microsoft (MSFT), 3M (MMM), and Johnson & Johnson (JNJ).

The portfolio also holds much smaller companies, including molecular diagnostic company Myriad Genetics (MYGN) and M2 Group (ASE:MTU), a phone and Internet provider in Australia and New Zealand.

A selection committee from Morningstar determines a company’s placement in the underlying index. Morningstar analysts assess each company’s exposure to each theme, ranging from no exposure to a perceived leadership position.

Then companies are ranked, with high rankings going to those with the greatest number of themes in which they have leadership positions, then the number of themes to which they have significant exposure and so on.

Using these criteria, the top 200 companies are chosen for the index, which is then equally weighted.

XT has a global portfolio, of which US companies account for about two-thirds. About 20% is in Western European stocks, with additional exposure to Canada, Australia, and emerging markets.

With its broad exposure to growth themes instead of specific industries, XT would be best used in a portfolio as a growth ETF rather than technology sector ETF analog. It has an expense ratio of 0.47%.

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