An Easy Way to Grab Fat Profit Margins

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some software companies to your portfolio, 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 PowerShares ETF's expense ratio -- its annual fee -- is 0.63%. The fund is fairly small, too, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.

This ETF has performed rather well, solidly beating the world market over the past three and five years. 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.

Why software?
Our planet's population is likely to keep demanding more and better software and, as the global economy recovers, sales should get a boost. Software is also appealing because of the typically strong profit margins in the industry (typically in the double-digit range), and the relatively low capital spending.


More than a handful of software companies had strong performances over the past year. Healthcare information services specialist Cerner (NAS: CERN) jumped 22%, and has averaged 19% growth annually over the past two decades. The company recently reported strong earnings, due, in part, to consolidation among its customers, as well as global growth. President Obama's health-care reforms include a mandate to move much of medical record keeping onto electronic formats, which also bodes well for Cerner. The main knock against it now may be its valuation.

Synopsys (NAS: SNPS) rose 20%, developing software to test and develop semiconductor chips. It has been growing by acquiring others, but some worry that it's too focused on a single niche. Revenue has been growing solidly, but net income has not kept pace. Free cash flow is strong, though, topping $400 million over the past year.

"Big Data" specialist Teradata (NYS: TDC) has gained some 11% over the past year, and has been successfully fending off competitors such as IBM (NYS: IBM) and Oracle (NAS: ORCL) . Its revenue and earnings have been growing at double-digit rates over the past few years, and growth rates have been accelerating, too. Its recent quarter was a bit disappointing, and management lowered projections, but it also noted that:

Teradata's competitive position has never been stronger, and we are well positioned with our market leading technology and solutions in three growing and strategic markets -- data warehousing, big data analytics and integrated marketing management.

Other companies didn't do as well last year, but could see their fortunes change in the coming years. Health-care information technology specialist Allscripts Healthcare Solutions (NAS: MDRX) , for example, shed 37%, and private-equity firms have been making bids for it. The government's support for digitizing health-care records makes the troubled company attractive to would-be purchasers.

The big picture
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.

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The article An Easy Way to Grab Fat Profit Margins originally appeared on Fool.com.

Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, owns shares of Teradata. The Motley Fool owns shares of International Business Machines, Oracle, and Teradata. Motley Fool newsletter services recommend International Business Machines and Teradata. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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