It was another solid quarter for the FactSet Innovative Technology SPDR ETF (NYSEARCA:XITK), even though both it and the Nasdaq fell quite a bit from the quarterly highs. Still, the XITK ETF tacked on a 16.1% gain in the third quarter versus a gain of “just” 11% for the index.
Given that the exchange-traded fund surged more than 47% in the second quarter, last quarter’s gains were impressive. Again that handedly outperformed the Nasdaq, which rallied 30.6% in Q2.
Some investors look at the XITK ETF and say, “No, that’s way too risky. I’ll stick with the index.”
To me it seems risky to have that kind of attitude toward the ETF, particularly one that continues to perform so well. Let’s look at this name more closely.
A Deeper Look at the XITK ETF
I like to know how a stock has done on the downside, as well as the upside. For instance, investors could have been long some bullish ETFs with two- or three-times leverage. I am talking about leverage within the fund, not with one’s own account.
In any regard, a 100% rally in a levered ETF vs. a 50% gain in the index does little good to me if it first fell 50% vs. a 25% dip in the index. Granted, it’s a bit more complex than that, but the point still stands. We have to consider performance in both directions.
For the XITK ETF, it’s up 52.2% this year and 75.8% over the past 12 months. That compares to the year-to-date and one-year gains of 23.4% and 42.3% for the Nasdaq, respectively.
In other words, it has crushed the index benchmark. The dominance extends to the longer-term too. The XITK is up 121% over the past three years vs. a 70% gain in the Nasdaq. The outperformance over the past five years is even more stark, at 245% vs. 139%.
But what about the downside? Have a look at the table below.
|2018 Q3 High to Q4 Low||Q4 2018 Performance||2020 Q1 High to Low|
Based on the table above, it’s clear that the XITK underperformed the Nasdaq in the fourth quarter of 2018 and during the novel coronavirus selloff of 2020. But given the major outperformance of the ETF vs. the index, being within a few percentage points during extreme moves is actually pretty impressive.
For instance, for the XITK ETF to fall 36.5% from the February high to the March low really isn’t that bad — that’s within 400 basis points of the Nasdaq. Heck, Apple (NASDAQ:AAPL) fell 35%, while Facebook (NASDAQ:FB) dropped about 39%.
Given how much more upside we are getting out of this fund, it’s worth giving up the couple of percent in underperformance at the extreme lows.
Is It Still One of the Best ETFs?
As you could have guessed, the FactSet Innovative Technology SPDR ETF is geared toward growth. Its top holdings have been fast-growing tech stocks. That has led to the ETF’s strong performance, although it does open up the XITK to potential downside should these stocks lose momentum.
With that said, I like that the top holdings are not heavily overweighted when it comes to allocation. For instance, Zoom Video (NASDAQ:ZM) is the largest holding in the ETF, with a weighting of just 3.4%. However, no other holding eclipses 3%.
The following five stocks have a lower weighting, but have also been impressive. That includes Shopify (NYSE:SHOP) and Twilio (NYSE:TWLO) with a 1.85% and 1.83% weightings, respectively. BiliBili (NASDAQ:BILI), CrowdStrike (NASDAQ:CRWD) and Wix.com (NASDAQ:WIX) round out eight through ten. They have a weighting between 1.65% and 1.85%.
Diversification can be a negative in some cases. In the case of the XITK ETF though, it helps remove any single-stock risk. That’s a benefit in my mind. That’s because growth stocks are likely to rally or fall together, but any one stock could really ruin the fund’s performance if it had too large of a weighting.
If growth stocks step on the gas pedal here in the fourth quarter, look for the XITK to outperform too.
On the date of publication, Bret Kenwell held a long position in TWLO and AAPL.