Technology Select Sector SPDR Fund Boom Isn’t Over – Yet

The Technology Select Sector SPDR Fund (NYSEARCA:XLK) ETF currently enjoys an accelerated growth trend. XLK stock saw its growth rate increase at the beginning of 2016 and has grown 50% in less than two years. This growth creates a problem for prospective buyers. Is now still a good time to buy in or have new investors missed an opportunity?

XLK Stock Benefits From Tech

Technology stocks have steadily risen in value since the previous stock market crash bottomed in 2009. Holders of XLK stock have enjoyed the ride, particularly in the last two years, with a low degree of risk. Despite this lower risk, the ETF has been rewarding for its current investors. The fund has returned about 37% this year. Overall performance has also been solid, even in more challenging periods. The 10-year average, which factors in the 2007-09 financial crisis, still stands at 11.43%.

XLK stock has about $19.5 billion under management and has an expense ratio of 0.14%. The ETF pays distributions of about 1.32%. Investors should note that tech stocks tend to pay less in dividends, so it shouldn’t be surprising that this distribution lags the S&P 500 average dividend of around 2%.

XLK Stock Has Bias Toward Large Caps

The fund currently invests in 72 U.S. technology equities. With a weighted average market cap of over $333 billion, buyers should note the emphasis on large-cap tech stocks. Its largest holdings include Apple Inc. (NASDAQ:AAPL), Microsoft Corporation (NASDAQ:MSFT), the two classes of Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), and Facebook Inc (NASDAQ:FB).

These four companies account for over 43% of the fund’s total assets. The fund’s top 25 holdings make up 84% of the fund. All of the top 25 are large-cap tech stocks, though some financial services and other sectors are included when they have a tech emphasis. This means their performance can provide a rough estimate of how the overall fund will perform.

Prospective buyers should also note a conservative bent in the fund. The average PE ratio for the fund overall is about 24. All of the top four have a PE ratio under 35. While high-flyers such as Broadcom Corporation (NASDAQ:BRCM) exist within the portfolio, they represent only a small percentage of XLK’s assets. Companies with high PE ratios, even ones that are large and famous, are less often held by the fund. Technology giants Amazon.com, Inc. (NASDAQ:AMZN) and Netflix, Inc. (NASDAQ:NFLX) remain notably absent from the fund’s holdings, probably for this reason.

Exercise Caution With XLK stock

Given its steady record of growth, it’s difficult not to recommend XLK stock. However, investors should exercise caution despite the fund’s diversified nature. A PE ratio of 24 doesn’t appear unusually high for an individual technology stock. However, in a diversified fund, this represents an ETF on the expensive side. Additionally, the 37% growth triples the long-term average for the fund, whose history dates back to 1998.

Moreover, the fund’s growth has placed it where it represents over 22% of the S&P 500. The technology boom of the 1990s ended soon after the threshold crossed the 25% mark. The same phenomenon occurred with the financial and energy sectors at times where they exceeded 25% of the index. So, while the boom may not have ended yet, people who buy now should look for signs of the boom’s end.

Bottom Line on XLK Stock

Although growth in the XLK stock price has been nothing short of impressive, new buyers should prepare to change course on signs the boom has ended. In football terms, I believe the current technology boom has entered the fourth quarter. The technology stocks within XLK have enjoyed an impressive growth spurt, particularly over the last couple of years.

The 24 PE ratio does not seem high compared to other tech stocks. However, it’s not cheap either, and investors have to remember that Amazon and Netflix are not around to skew it higher. XLK stock is also approaching that 25% of the S&P 500 mark that’s served as a bear signal for decades. Still, this boom probably has some time left. Buyers should get on the field and make plays. However, if XLK stops scoring for investors, do not hesitate to take a knee and leave the field.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.

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