The arrival of October marks the start of the fourth and final quarter of 2018, meaning third-quarter earnings season is about to kick-off in meaningful fashion.
“During the third quarter, analysts lowered earnings estimates for companies in the S&P 500 for the quarter,” according to FactSet. “The Q3 bottom-up EPS estimate (which is an aggregation of the median EPS estimates for all the companies in the index) has dropped by 1.1% (to $40.54 from $41.00) during this period.”
Technology is the largest sector in the S&P 500 and the best-performing group in the U.S. again this year, underscoring the importance of technology stocks and exchange-traded funds (ETFs) as third-quarter earnings arrive. Data suggest analysts remain bullish on tech. Among S&P 500 tech names, analysts have “buy” or equivalent ratings on 57% with just 6% garnering “sell” or equivalent ratings.
Investors considering tech ETFs ahead of earnings season should eye the weeks of Oct. 22 and Oct. 29. Over those two weeks, over 56% of the S&P Technology Select Sector Index steps into the earnings confessional.
Here are some of the tech ETFs to buy as earnings season arrives.
Technology Select Sector SPDR (XLK)
Expense Ratio: 0.13%, or $13 annually per $10,000 invested
The Technology Select Sector SPDR (NYSEARCA:XLK) is a bellwether among tech ETFs, but investors should note XLK is not the same tech ETF it used to be. With the recent debut of the communication services sector, XLK and rival old guard tech ETFs are without familiar names such as Alphabet (NASDAQ:GOOG NASDAQ:GOOGL) and Facebook (NASDAQ:FB).
XLK, which tracks the aforementioned Technology Select Sector Index, was previously a top-heavy tech ETF, but that is even more so the case today. Following the departures of Alphabet and Facebook, Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) combine for over 37% of XLK’s weight — a figure that’s exceeding the combined weight of XLK’s eight other top 10 holdings.
XLK holds 65 stocks, nearly 52% of which are software and IT services providers. Semiconductor stocks represent 18.51% of this tech ETF’s roster.
Invesco S&P SmallCap Information Technology ETF (PSCT)
Expense Ratio: 0.29%
Small-cap stocks and ETFs, for most of this year, have been delivering for investors. To start the fourth quarter, there has been some erosion in that trade, which has sent the Invesco S&P SmallCap Information Technology ETF (NASDAQ:PSCT) lower by about 3% over the past week. This tech ETF is still up almost 9% year-to-date.
This tech ETF’s 90 holdings “are principally engaged in the business of providing information technology-related products and services, including computer hardware and software, Internet, electronics and semiconductors and communication technologies,” according to Invesco.
Small-cap earnings start rolling in significant fashion in October’s latter stages. Over the last two weeks of this month and the first month of November, over three-quarters of the Russell 2000 Index reports earnings, so those will be the weeks to carefully monitor the PSCT ETF.
Invesco Dynamic Software ETF (PSJ)
Expense Ratio: 0.63%
Among tech ETFs, some of the best performers this year are dedicated software funds. Up more than 33% year-to-date, the Invesco Dynamic Software ETF (NYSEARCA:PSJ) proves as much. The PSJ holds 30 stocks, but as a smart beta tech ETF, this fund is not dominated by Microsoft.
PSJ’s index “is designed to provide capital appreciation by thoroughly evaluating companies based on a variety of investment merit criteria, including: price momentum, earnings momentum, quality, management action, and value,” according to Invesco.
Each of the PSJ ETF’s top six holdings garner weights of just over 5%. That group includes Salesforce (NYSE:CRM) and Microsoft. With growth stocks (over 82% of PSJ’s weight) being in style over the past several years, this tech ETF is outperforming cap-weighted software benchmarks. Over the past three years, PSJ is beating the S&P 1500 Software & Services Index by nearly 200 basis points. This tech ETF has a five-star Morningstar rating.
iShares PHLX Semiconductor ETF (SOXX)
Expense Ratio: 0.47%
The iShares PHLX Semiconductor ETF (NASDAQ:SOXX) and other semiconductor ETFs have been a mercurial bunch this year. The tech-heavy Nasdaq-100 Index is up more than 19% year-to-date, but the SOXX ETF is higher by just 10%.
As an earnings play, this tech ETF could be tested for much of the third-quarter reporting season. From the week starting Oct. 15 through the week ending Nov. 16, over 81% of the PHLX SOX Semiconductor Sector Index, SOXX’s underlying benchmark, report earnings.
With SOXX, the reports with the potential to move this tech ETF are Broadcom (NASDAQ:AVGO), Qualcomm (NASDAQ:QCOM), Nvidia (NASDAQ:NVDA) and Intel (NASDAQ:INTC) because that quartet combines for nearly a third of this tech ETF’s roster.
First Trust Dow Jones Internet ETF (FDN)
Expense Ratio: 0.53%
As noted earlier, the new communication services sector means a lot of Internet stocks that used to reside in the tech sector are not there anymore. Plus, Amazon (NASDAQ:AMZN) is a consumer discretionary name, meaning many tech ETFs do not offer exposure to the e-commerce giant. The First Trust Dow Jones Internet ETF (NYSEARCA:FDN) solves those issues for investors, making it one of the standout tech ETFs to buy.
The FDN ETF holds 42 stocks, but the primary drivers of is price action are Amazon, Salesforce, Facebook, Netflix (NASDAQ:NFLX) and Alphabet. FDN illustrates the advantages of a basket approach. For example, shares of Facebook are down nearly 10% this year, but this tech ETF is up more than 26%.
Investors are flocking to the FDN ETF. Thanks to 2018 inflows of $2.26 billion, FDN now has $9.45 billion in assets under management, enough to make it the biggest internet ETF, one of the largest tech ETFs and one of the 100 largest U.S.-listed ETFs.
As of this writing, Todd Shriber did not own a position in any of the aforementioned securities.