Should You Buy the Nasdaq's Forgotten Stocks?

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Lately, the growth in popularity of exchange-traded funds has given investors ever more narrow slices of niche sectors of the market. But one set of new ETFs is going back to basics by giving investors something that's truly valuable: more diversification from a broader chunk of a huge market. By doing so, these ETFs will give you access to stocks that many investors typically overlooked until now.

Going beyond the tech giants
If you're looking to invest in big technology stocks, the easy one-stop shop for more than a decade has been the PowerShares QQQ ETF, which tracks the popular Nasdaq 100 Index (INDEX: ^NDX) . As its name suggests, the Nasdaq 100 represents 100 of the biggest companies that trade on the Nasdaq exchange. Although it isn't entirely composed of tech companies, technology is by far the largest sector represented in the index, with more than two-thirds of the assets in the QQQ ETF assigned to technology.

But two new ETFs released by Global X Funds aim to give investors a broader look at the Nasdaq. The Global X Nasdaq 500 ETF will track the broad Nasdaq 500 index, which goes beyond the narrower Nasdaq 100 to include 400 more stocks. The Global X Nasdaq 400 Mid Cap will explicitly focus only on those 400 lesser-followed Nasdaq stocks.

The result is a much less tech-heavy portfolio, especially in the case of the mid-cap ETF. Global X Nasdaq 400 will only have a 37% allocation to technology, with health-care and consumer stocks each making up about 20% of the portfolio. And while the ETFs will still have a woefully small allocation to sectors like energy and materials, those sectors will be somewhat better represented.

What are the hidden Nasdaq stocks?
Looking at the stocks that these ETFs will include that the Nasdaq 100 ETF doesn't reveals some interesting choices. Pharmasset (NAS: VRUS) has attracted plenty of attention for its hepatitis C treatments, attracting a lucrative buyout bid from Gilead Sciences (NAS: GILD) last month. Generic prescription and over-the-counter drugmaker Perrigo (NAS: PRGO) has also seen strong growth, and Hansen Natural (NAS: HANS) continues to benefit from the popularity of its Monster energy drinks to drive market share gains over competing products like Red Bull.

Moreover, even though some of these smaller companies are still in technology, they're lesser-known and typically have interesting niches that could eventually attract takeover bids from larger rivals. For instance, Avago Technologies (NAS: AVGO) makes power amplifier chips for smartphones, letting investors profit from the surge in smartphone popularity. Similarly, Nuance Communications (NAS: NUAN) has drawn interest due to its voice-recognition technology, which recently showed up in the latest version of the iPhone. Over time, these up-and-coming stocks may be much more lucrative for investors than those already in the Nasdaq 100.

One of the most interesting things about the Nasdaq indexes is that all of them exclude financial stocks. That's a serious omission, although it's also been a big benefit in recent years as financials have had terrible performance.

Worth a look
Many ETF investors may dismiss the new Global X Nasdaq ETFs as unnecessary. After all, you can already get even broader exposure from total-market ETFs, and putting so much weight on what exchange a stock happens to trade on is admittedly arbitrary.

From a broader perspective, though, the good news is that at least in this instance, Global X is bucking the trend toward ever-narrower ETFs to take a stab at adding something of real value for ETF investors. Especially with the mid-cap Nasdaq ETF, the ETF provider is filling a void that many investors ignore -- at their peril. For investors who follow the Nasdaq but aren't wedded solely to technology stocks, these ETFs will be a welcome addition to your ETF investing toolbox.

Smart ETF investors need to look beyond the Nasdaq for complete diversification, though. In The Motley Fool's latest free special report on ETFs, you'll get three great ideas that could boost your portfolio's performance. Take a look today while it's still available.

At the time this article was published

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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