Make Money in Growing Software Companies the Easy Way

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you expect the software industry to thrive as our demand for more and more electronic products and services continues, the PowerShares Dynamic Software ETF (NYS: PSJ) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The software ETF's expense ratio -- its annual fee -- is 0.63%, considerably lower than the typical stock mutual fund.

This ETF has performed rather well, beating the S&P 500 over the past three and five years, on average. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

What's in it?
Several of this ETF's components made strong contributions to its performance in 2011. Cadence Design Systems (NAS: CDNS) is up 37% year-to-date, providing software to aid in the design of circuitry and semiconductors. Its future looks promising, with customers such as Intel (NAS: INTC) telling the design industry exactly what they need and revenue starting to rise after slumping for a while.

Microstrategy (NAS: MSTR) gained 54%, but its operating margins significantly trail those of competitors such as Oracle (NAS: ORCL) , suggesting that it's not the most efficient game in town. And Nuance Communications (NAS: NUAN) , up 41%, is one of the fastest growers in software, specializing in voice and supplying its technology to Apple (NAS: AAPL) for its iPhone Siri service. Its profit margins have been on the low side for a software company, though.

Other companies, such as BMC Software and Medidata Solutions, didn't add to the ETF's returns this year, but could have an effect in the years to come.

The big picture
Demand for software isn't going away anytime soon. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.

Learn aboutthe best dividend ETFs. And if you're looking for some great investments beyond ETFs, consider these10 Stocks for Your Retirement Portfolio.

At the time thisarticle was published LongtimeFool contributorSelena Maranjianowns shares of Intel and Apple, but she holds no other position in any company mentioned.Click hereto see her holdings and a short bio. The Motley Fool owns shares of Apple, Oracle, BMC Software, and Intel, as well as call options on Intel.Motley Fool newsletter serviceshave recommended buying shares of Intel, Apple, and Nuance Communications, as well as creating bull call spread positions on Intel and Apple. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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