From 2005 to 2012, global software sales nearly doubled to rougly $270 billion from $143 billion. That number is forecast to grow to $330 billion this year, so it is reasonable that tactical investors consider exchange traded funds with a dedicated software focus.
A hidden gem among software ETFs is the PowerShares Dynamic Software Portfolio (PSJ) . PSJ, which is just two months shy of its tenth anniversary, is up 7.8% this year, an advantage of 150 basis points over the Nasdaq Composite. On Wednesday, PSJ was one of 36 ETFs to hit an all-time high. [Sector ETFs for Cyclical Trends]
Like other well-known PowerShares industry ETFs, including the PowerShares Dynamic Biotechnology & Genome Portfolio (PBE) and the PowerShares Dynamic Pharmaceuticals Portfolio (PJP) , PSJ tracks an Intellidex index that “is designed to provide capital appreciation by thoroughly evaluating companies based on a variety of investment merit criteria, including: price momentum, earnings momentum, quality, management action, and value,” according to PowerShares.
PSJ’s 30-stock roster is home to some familiar software names including Dow component Microsoft (MSFT), video game publisher Electronic Arts (EA), QuickBooks and TurboTax publisher Intuit (INTU) and King Digital (KING), the maker of Candy Crush Saga. Those stocks combine for 17.6% of the ETF’s weight.
In addition to those well-known software names, what makes PSJ compelling is its exposure to two prominent technology themes: Cloud computing and cyber security. At least three PSJ holdings are also constituents in the First Trust ISE Cloud Computing Index Fund (SKYY) , which also made an all-time high yesterday. The global cloud computing market is expected to expand 30% per year and hit $270 billion by 2020.
Two PSJ holdings are also found in the PureFunds ISE Cyber Security ETF (HACK) , one of this year’s top-performing technology ETFs. HACK also hit an all-time high on Wednesday. Both HACK and SKYY are littered with potential takeover, which could prove to be good news for PSJ in the future. [The Soaring Cyber Security ETF]
The tech space is sporting a slightly higher valuation than the broader equities market, but it isn’t too high for a growth-oriented sector. For example, PSJ’s price-to-earnings ratio is just over 25 while the PowerShares QQQ (QQQ) , which tracks the Nasdaq-100, has a P/E of nearly 21.
PowerShares Dynamic Software Portfolio