This Tech ETF Has Almost Doubled In Size In A Month

The PowerShares QQQ Trust, Series 1 (ETF) QQQ, the NASDAQ-100 tracking exchange-traded fund, has surged more than 6 percent over the past month, while the Technology SPDR (ETF) XLK, the larges technology ETF, is higher by about 5.4 percent over the same period.

With those data points in mind, it is not a stretch to say technology stocks and the corresponding ETFs are shaking off some of the doldrums experienced earlier this year. On that note, it is worth examining which tech sub-sectors are bolstering the sector at large. Dow component Microsoft Corporation MSFT is up nearly 15 percent over the past month, indicating that software stocks have been drivers of the recent tech resurgence.

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Tech Sub-Sector: Software

Software leadership is also benefiting a previously unheralded ETF, the PowerShares Dynamic Software (ETF) PSJ. The PowerShares Dynamic Software Portfolio, which has been around for more than a decade, has climbed nearly 4 percent over the past month. Remarkably, the ETF has done so with no assistance from Microsoft.

PSJ's 30 holdings “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, but Microsoft is not found in this ETF.

It's Not All About Microsoft

That is not stopping investors from getting involved with PSJ. Over the past month, investors have allocated $53.7 million in new assets to PSJ. While that might not sound like much, consider the following. First, $53.7 million of inflows in a month is good for the 12th-best total among all PowerShares ETFs. Second, that is $53.7 million of $114.1 million in total assets under management, meaning PSJ has nearly doubled in size in a month.

PSJ's recent bullishness could be seen as a sign that market participants are warming to mid- and small-cap tech names. As was noted earlier, Microsoft is not found in this ETF. Moreover, the average market capitalization of PSJ's 30 constituents is just $7.6 billion.

The Intellidex Factor

Like the other PowerShares ETFs that track Intellidex indexes, PSJ evaluates potential holdings based on price momentum, earnings momentum, quality, management action and value. Over the long term, that methodology has proven rewarding; PSJ has outperformed the S&P Software & Services Index by over 100 basis points since the ETF came to market over 10 years ago.

Nothing Is Perfect

One quibble with PSJ could be valuation – as in, the ETF looks pricey compared to the broader tech sector with a price-to-earnings ratio north of 27.

Then again, the ETF's implementation of the momentum factor can lead to some higher valuations, but it is hard to argue with the recent performance.