After Tech Earnings, What’s Next for Tech ETFs?

Advertisement

Earnings season has been extremely uneven for the tech sector, the largest sector weight in the S&P 500. Just look at what happened to some of the big tech stocks after earnings.

Tech Stocks

Source: Zoom by Jean Sander

Apple (AAPL) reported fiscal third-quarter earnings of $1.85 per share, up nearly 45% from the year-earlier period. Revenue surged 32.5% to $49.6 billion. For most normal companies, those results would have elicited a big rally in stock, but Apple is not just any old company, and AAPL stock is down 13% since then.

Microsoft (MSFT) earnings were solid, but Wall Street was not impressed. The opposite was true of Amazon (AMZN) and Google (GOOG), each of which saw their earnings reports met with sharp stock jumps in the span of just one trading day.

And, broadly speaking, social media earnings have been a mess with some of the industry’s marquee names bogged down by rising expenses. However, the post-earnings lethargy displayed by some tech exchange traded funds could be opening the door for prescient buyers. Let’s take a look at a few examples here.

Technology SPDR (XLK)

The Technology Select Sector SPDR (XLK) is one of the bellwether tech ETFs because it is the largest with $13 billion in asset under management. XLK is also a cost-efficient avenue for investors looking for tech sector exposure with an annual fee of just 0.15%, or $15 per $10,000 invested.

In an ETF universe littered with increasingly complex products, XLK represents a straightforward approach to some of the tech sector’s most venerable, but even with that, investors owe it to themselves to look under the hood. For example, if you’re looking for ETF proxies for Amazon and Netflix (NFLX), this is not the ETF for you because those companies are classified as consumer discretionary firms.

What you do get with XLK is exposure to Apple … a lot of it. The iPad maker is XLK’s largest holding at a weight of almost 17.1%. That compares with a 9% weight in Microsoft, XLK’s second-largest holding. In other words, sure XLK has exposure to Facebook, Google, Microsoft and friends, but Apple is by far the most important determinant of this ETF’s price action.

For investors that can stomach Apple being the tail that wags XLK, there are some perks to this ETF. For starters, XLK’s big-name holdings, namely Apple, Google and Microsoft, have some of the biggest cash stockpiles in Corporate America.

Second, as we noted earlier this month, tech, despite a still diminutive yield, is an excellent source of dividend growth. And growing is exactly what tech dividends have been doing. In fact, tech stocks have been one of the primary drivers of S&P 500 payout growth over the past five years. During the first quarter, 36 S&P 500 tech stocks boosted payouts and none lowered dividends, according to FactSet.

Seven of XLK’s top 10 holdings are dividend payers.

PowerShares QQQ (QQQ)

The PowerShares QQQ (QQQ), the Nasdaq 100 tracking ETF, is another behemoth ETF, but investors should note this is not a dedicated tech fund. That gives investors broad exposure as tech stocks are “just” 54% of QQQ’s weight. But with some other sectors playing pivotal roles in the ETF’s price action, the outlook for QQQ has some moving parts.

For example, consumer discretionary names account for nearly 20% of QQQ’s weight. And yes, that includes some exposure to darlings like Amazon and Netflix. The advantage here is that discretionary names are gaining steam on the back of lower fuel prices and improving labor data.

QQQ’s wild card comes by way of an almost 16% weight in healthcare, and when we’re talking Nasdaq healthcare stocks, we’re talking biotechnology. Broadly speaking, big biotechnology earnings have been solid, but QQQ would not be immune to any retrenchment in the biotech space. Plus, a combined weight of over 35% in consumer discretionary and biotech stocks has the Nasdaq 100 looking richly valued relative to other broad indices.

Those frothy valuations aren’t keeping investors away, though. Over the past month, QQQ has added almost $922 million in new assets, bring its assets under management tally to $41.6 billion. QQQ charges 0.2% per year, or $20 per $10,000 invested.

As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.

More From InvestorPlace

Todd Shriber has been an InvestorPlace contributor since 2014.


Article printed from InvestorPlace Media, https://investorplace.com/2015/08/tech-stocks-tech-etfs/.

©2024 InvestorPlace Media, LLC