Technology stocks have been rising sharply recently and they appear to have momentum to climb even further. Innovation is one of the reasons why this sector has the potential for a continued ascent, even while other sectors may pull back after sharp recent gains. An exchange-traded fund (ETF) that I want to bring to your attention as a possible buy is the iShares Dow Jones U.S. Technology Sector Index Fund (IYW).

This fund is designed to let you play the technology field and to avoid having to put too much importance on any one tech stock’s fortunes, such as Apple’s continued climb, Yahoo’s growth strategy or Google’s latest surge.

Specifically, IYW seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the largest public companies in the technology sector of the U.S. market, as represented by the Dow Jones U.S. Technology Index. The fund’s top ten daily holdings as of October 19, 2010, were: Apple, Inc., 13.63%; Microsoft Corp., 9.48%; Intl Business Machines Corp., 8.68%; Google, Inc., 7.19%; Cisco Systems, Inc., 6.44%; Oracle Corp., 5.52%; Hewlett-Packard Co., 4.19%; Intel, 4.15%; Qualcomm, Inc., 3.54%; and EMC Corp., 2.11%. Its top two sectors for investing on the same date were technology hardware, 55.71%, and software & computer services, 44.25%.

Last Friday, the technology sector zoomed as the rest of the market basically was flat. An impressive rally by technology stocks that day was led by gains of 10.9% for Google, 2.7% for Apple and 4.5% for Amazon.com.

Apple’s stock price topped $300 for the first time ever last week and it announced strong third-quarter earnings on Monday. It also is considered by certain Wall Street technology analysts to have the coolest products available for purchase during the upcoming holiday-selling season. The company sold 14.1 million units of its iPhone 4 in the third quarter to top analyst estimates, while sales for its iPad and iPod products slipped a bit below analyst forecasts. A big challenge for Apple going forward is trying to keep up with Wall Street’s lofty sales projections for the company.

Yahoo Inc., after reporting another quarter of modest revenue growth, held an earnings call yesterday that did nothing to douse speculation that it could be a takeover candidate. Indeed, Chief Executive Carol Bartz sidestepped questions about private-equity firms discussing a possible buyout of the Internet media company. Nonetheless, the speculation that Yahoo could be an acquisition target seems to be giving its stock price a lift. The stock rose 2% today alone.

One of the beauties of an ETF is that it allows an investor to purchase one fund and gain exposure to an entire sector. It is a great way for investors to hedge their bets, and to avoid taking a big hit if a single company suddenly faces bad news.

Even though technology has been on a run and is up year to date, many of these stocks still are well below their 2007 highs by double-digit percentages. As a result, they could be expected to rise further in the weeks and months ahead. A heavily depreciating U.S. dollar also is causing U.S. technology exports to become less expensive for foreigners to buy. The weak dollar certainly will help U.S. technology exports in the fourth quarter of 2010. Clearly, there is much to like about the U.S. technology sector right now.

If you want advice from me about which ETFs to buy and to sell, I encourage you to sign up for my ETF Trader service by clicking here. As always, I am pleased to answer any of your questions about ETFs, so do not hesitate to contact me if you have one. To send your question to me, simply click here. You may just see your question answered in a future ETF Talk.