After remaining out of investor favor for the past few years, some of tech giants have returned into limelight this year. Strong second quarter earnings have further pushed these stocks to multi-year highs.
Yesterday’s GDP report shows that the US economy expanded at 4.0% in the second quarter, rebounding strongly after shrinking in the first quarter due to bitter winter. Improving economy is supportive for stocks in general and for economically sensitive sectors like Technology. Below we have discussed some strong reasons for investing in Technology ETFs now. (Read: Best ETF strategies to consider now)
Solid Second Quarter Earrings
Per Zacks Earnings Trends, growth from the technology sector has been the best in many recent quarters, as total earnings for 69.1% of the sector that have reported so far are up 11.8% on 6.9% higher revenues, with Micron Technology and Apple driving most of the year-over-year growth. 65.2% of the companies have beaten earnings expectations and 56.5% beating revenue expectations.
Further revenue beat ratio so far is much better compared to the past few quarters, confirming that companies are able to grow their sales as the global economic picture brightens. In the past, companies used cost-cutting, share buybacks and/or some financial engineering tricks to bolster their bottom-lines while the top-lines remained flattish. (Read: 2 Hot Summer ETFs Surging to #1 Ranks)
Total earnings for the Technology sector are expected to be up +9.5% from the period last year on +5.7% higher revenues. This would follow +3.7% earnings growth for the sector on +3.1% higher revenues in Q1.
Global IT Spending Rising
Lackluster global economic growth had forced corporates to tighten their IT budgets. Now with economic growth picking up momentum, tech companies are likely to benefit from higher corporate IT spending.
Per Gartner, global IT spending is expected to rise 2.1% in 2014 and 3.7% in 2015;
“2015 through 2018 will see a return to ‘normal’ spending growth levels as pricing and purchasing styles reach a new equilibrium.”
Returning Cash to Shareholders
Most investors think of investing in sectors like telecom and utilities for regular sources of income. However income investments do not exclude technology sector now. In general, technology companies avoid paying dividends and instead plow back cash into their businesses for expansion, acquisitions and R&D.
However many of the technology giants have matured and have solid, stable cash flows. Further, global economic recession and muddle through economic growth thereafter left these giants with few growth opportunities in the last few years, leaving them to accumulate huge piles of cash on their balance sheets. Many of them will return a lot of this cash to investors in the form of dividends and buybacks. (Read: 3 MLP ETFs for Excellent Growth & Income)
Per FactSet, during Q1 IT led all sectors in dividend per share growth (24.2%) for the sixth consecutive quarter. The growth is however expected to moderate somewhat in the coming quarters. The sector has also been a leader in buybacks with 175.5% growth in quarterly repurchase speeding during Q1.
Valuation Looks Attractive
Out of 10 S&P sectors, Information Technology is currently rather attractively valued with its P/E at 16.6x and 14.8X respectively for 2014 and 2015 expected earnings.
Consider These Top Ranked ETFs
Below we have highlighted three Zacks Rank #1 (Strong Buy) ETFs that provide a broad exposure to the technology sector. These ETFs invest primarily in well-known, high-quality, large cap technology companies and not so much in smaller, higher-risk, speculative stocks. (Read: Facebook beats but lofty valuation puts these ETFs on watch)
Vanguard Information Technology ETF (VGT)
With an expense ratio of just 14 basis points, this is one of the cheapest option in the space. It has a dividend yield of 0.95% currently. With almost 55% of its assets invested in top ten holdings, the fund is top-heavy. Tech giants like Apple, Microsoft, Google, IBM and Intel are the top five holdings.
The ETF has amassed $5.7 billion in assets so far, which are invested in 416 holdings.
S&P SPDR Technology ETF (XLK)
With AUM of $13.5 billion, XLK is the most popular tech ETF. It is less diversified than VGT as it holds only 71 companies in its portfolio, with Apple and Microsoft together accounting for almost a quarter of the assets.
XLK is also quite cheap with an expense ratio of 16 basis points. Further, it sports an attractive dividend yield of 1.7%.
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