Why SSDD Is The Top Tech ETF - ETF News And Commentary
06 Marzo 2012 - 5:01AM
Zacks
As European issues continue to slowly fade away, the economic
situation begins to look more bullish. Recent readings in the U.S.
regarding solid jobs reports and decent levels in the ISM figures
also haven’t hurt, making many investors feel more optimistic about
the future. Additionally, while stocks have certainly surged to
start the year, equities are at their cheapest PE level at any 52
week peak since the late 80’s. This suggests that stocks could have
further to run, especially if bearish signals continue to be hard
to come by.
Among the best performing sectors during this time has
undoubtedly been the technology industry. The segment has benefited
from improving sentiment over European issues as well as hopes of
more business spending back in the U.S. as well. Thanks to this,
the broad tech sector ETF, the SPDR Select Sector
Technology Fund (XLK) has handily beat out the S&P 500
year-to-date, outgaining the key benchmark by about 450 basis
points in a little over eight weeks time. Yet, even this solid
track record cannot compare to the strength that investors have
seen in one often overlooked segment of the technology world, the
solid state drive industry (also see Inside The Cloud Computing
ETF- SKYY).
This segment focuses on companies that make these new data
storage devices which use microchips instead of magnetic disks on
in order to store data. This technology means that SSDs have no
moving parts which, in addition to making them more stable,
promotes quicker access speeds as well. However, this newer
technology is often more expensive their hard disk drive cousins, a
factor which has limited the widespread adoption of solid state
drive equipment.
Yet, this is slowly beginning to change as SSDs become more
competitive from a price perspective. Many believe that the
technology in the SSDs is the wave of the future and that the only
thing holding them back is their cost. As they find their way into
more systems and are implemented on a larger scale, the price seems
poised to drop making the segment a key growth industry in the
technology world (see Three Technology ETFs Outperforming XLK).
In order to play this segment, UBS recently launched the
E-TRACS ISE Solid State Drive Index ETN (SSDD)
which offers targeted exposure to the industry. The note offers
exposure to 11 companies in total, using an equal weighted
allocation across the drive manufacturer and component manufacturer
categories in order to give representation to both segments of the
space. Additionally, SSDD also uses equal weighting for all
components within each sector category and these are rebalanced on
a quarterly basis.
In terms of top holdings, three stocks currently make up over
10% of the product including; Silicon Motion Technology
(SIMO), SanDisk (SNDK), and
Marvell Technology (MRVL). Thanks to this, the
product also has a decent breakdown across nations, putting about
30% of assets outside the U.S. For costs, the product charges 65
basis points a year in fees but sees very weak volume of less than
1,000 shares a day. This implies that bid ask spreads for the note
could be very wide, which could add to the total costs of the UBS
note for investors (see ETFs vs. ETNs: What’s The
Difference?).
Yet, despite the potential for higher costs and the ETN
structure, SSDD could prove to be an investor favorite thanks to
its strong performance this year. Like many tech sector ETFs, this
fund has been on an absolute tear markedly beating the S&P 500
so far in 2012, while it has also crushed XLK as well. SSDD has
gained over 30% in the time frame, more than doubling XLK and
tripling other tech ETF gains since the start of January.
Given the impressive run-up, however, some investors may be
betting on a slump in the next few weeks as expectations bring SSDD
back to earth. This could be premature though, especially
when looking at the Zacks Rank for many of the underlying
securities in the basket. Of the 11 companies in SSDD, three have
the top Rank of 1 or ‘Strong Buy’ while only one has a Rank of 4 or
5 which equates to ‘Sell’ or ‘Strong Sell’. Furthermore, the only
stock that does have a Rank of 4 is the smallest component in the
fund while the biggest component, SIMO, currently has a Rank of 1.
This suggests that earnings estimate revisions could be tilted in
favor of the sector and that further gains could be had in the
space (read Five ETFs To Buy in 2012).
With that being said, it is important to remember that the Zacks
Rank can change quite quickly, especially if estimate trends see a
reversal. Also, the SSD space is still quite fresh and is heavily
concentrated, a situation that can prove to give added volatility
to the space in a short period of time. However, if investors can
get over the extremely low volume that is currently in the product,
SSDD could be an interesting choice for those seeking targeted tech
exposure in the second quarter of the year.
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MARVELL TECH GP (MRVL): Free Stock Analysis Report
SILICON MOTION (SIMO): Free Stock Analysis Report
SANDISK CORP (SNDK): Free Stock Analysis Report
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Etracs Ise Solid State Drive Index Etn Due September 13, 2041 (AMEX:SSDD)
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Etracs Ise Solid State Drive Index Etn Due September 13, 2041 (AMEX:SSDD)
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