Tech has taken its lumps the past couple months. The most recognizable exchange-traded fund in tech — the Technology Select Sector SPDR (NYSE:XLK) — is down almost 11% since mid-September, about twice as bad as the S&P 500.
That might just spell opportunity.
The XLK tracks an index featuring a bundle of tech companies in the S&P 500 (currently 78) that is weighted by market capitalization. Thus, when you invest in XLK, you’re making a heavy bet on larger operators like Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), IBM (NYSE:IBM), AT&T (NYSE:T) and Google (NASDAQ:GOOG) — these five companies alone account for nearly 47% of XLK’s assets.
When things are bad for those five, life’s pretty bad for XLK. AAPL, its top holding at nearly 20% weight, has dropped nearly 20% since September. The other four:
But for the long haul, the XLK’s top-heavy makeup should prove to be a boon.
These top-tier tech companies are better suited to weather a slowing in the global economy, boasting entrenched customer bases, broad product offerings and substantial amounts of cash. A number of them also provide decent dividends, which means XLK investors also get a modest 1.5% annual yield.
Plus, if the equities markets remain weak, these tech giants should be able to find some good opportunities for M&A, which — when done rightly — can bolster long-term growth. The strategy certainly has been vital for IBM, Google and Microsoft in the past.
Also importantly, when you look at the top five companies in the XLK, you see leaders in some of the biggest megatrends in technology, including cloud computing, mobile technology and virtualization. These forces are likely to remain intact, even amid a recession.
After all, can Americans really live without their smartphones anymore?
If you look deeper into the portfolio of XLK, some of the holdings are dicey. No. 9 holding Cisco (NASDAQ:CSCO, 3.21% weight) has been feeling the competitive pressures on its core networking business. No. 10 holding Intel (NASDAQ:INTC, 3.2% weight) continues to lag because of its huge reliance on the PC market. And while it doesn’t make up much of the fund at just 0.8%, Hewlett-Packard (NYSE:HPQ) is a pretty well-known flop of late.
On the flip side, these companies have seen big drops in their value already, and especially in the cases of Cisco and Intel, might be on the oversold side.
Not to mention, for as many weaker holdings as XLK has after the top 5, there’s a number of solid growth prospects, including eBay (NASDAQ:EBAY), Salesforce.com (NYSE:CRM) and Intuit (NASDAQ:INTU). All are finding ways to grow at a rapid pace — and as they grow, they’ll become an increasingly bigger driver of the fund.
Timing moves in technology ain’t easy, as the sector is inherently volatile. If anything, there could actually be some more weakness left in the XLK right now. But investors looking for a long-term play on technology can’t do much better than XLK, which charges a low 0.18% in expenses for plenty of diversification (and a little heft — but behind some top-notch companies) and exposure to some of technology’s top trends.
Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “How to Create the Next Facebook.” Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.