Market Overview

A Surging Software ETF

A Surging Software ETF

Various signs indicate the technology sector's late first-quarter swoon was brief and has concluded. Tactical traders and investors should take note: while broader technology exchange traded funds are bouncing back, some more focused plays are surging.

On Wednesday, nearly 25 ETFs hit all-time highs. Of that group, eight can be considered “focused” tech funds. That includes the PowerShares Dynamic Software Portfolio (NYSE: PSJ), a smart beta spin on software stocks that's gained 18 percent year-to-date.

What Happened

PSJ is outpacing the Nasdaq 100 Index and standard diversified technology ETF by a 2-1 margin this year.

The ETF, which turns 13 next month, follows the Dynamic Software Intellidex Index. The index evaluates companies based on price momentum, earnings momentum, quality, management action and value. As a result, PSJ's roster of 29 stocks is small compared to some cap-weighted software funds.

Why It's Important

PSJ holdings “are companies that are principally engaged in the research, design, production or distribution of products or processes that relate to software applications and systems and information-based services,” according to PowerShares.

Due to its methodology, PSJ is unlikely to be dominated by traditional software makers such as Microsoft Corp. (NASDAQ: MSFT) and Oracle Corp. (NYSE: ORCL). While Microsoft is almost 5 percent of PSJ's weight, that is below the weights assigned to the stock in traditional tech ETFs. Oracle is not a member of PSJ's roster.

Oonly 41.57 percent of PSJ's holdings are classified as large-cap stocks. Over 30 percent of PSJ components are mid-cap growth and value stocks.

What's Next

Red Hat Inc. (NYSE: RHT), Adobe Systems Inc. (NASDAQ: ADBE) and Inc. (NYSE: CRM) combine with Microsoft to represent over 20 percent of PSJ's roster. Simultaneous strength by those stocks would likely fuel more upside for the fund, as would investors continuing to embrace more focused areas of the broader technology sector.

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