Health care exchange traded funds have dominated among sector funds in terms of 2014 inflows. Regarding performance, the Health Care Select Sector SPDR (XLV) and the Utilities Select Sector SPDR (XLU) are the best of the nine sector SPDR ETFs to this point in 2014.
That does not mean investors should sleep on the S&P 500’s largest sector weight: Technology. Not when the sector “has the highest three-year revenue growth, on a compounded annualized basis, and the highest operating margins among all S&P 500 Index sectors. Furthermore, from a valuation perspective, the sector trades at a P/E and P/E-growth multiple that is lower than the broader market,” according to a research note by S&P Capital IQ.
The Technology Select Sector SPDR (XLK) , the second-largest U.S. sector ETF, and the Vanguard Information Technology ETF (VGT) are up an average of 3.5% this year despite Apple (AAPL) trading lower by 4.1%. Apple is XLK’s largest holding by nearly 400 basis points over Google (GOOG). Apple occupied 12.5% of VGT’s weight, a 360-basis point advantage over Google at the end of January. [Apple a Double-Edged Sword for ETFs]
Both ETFs garner overweight ratings from S&P Capital IQ.
Although Apple, the larges U.S. company by market value, has been a disappointment this year, XLK, VGT and rival funds such as the iShares U.S. Technology ETF (IYW) have benefited from increased weights to Google and Facebook (FB). As the market values of those stocks and others have appreciated, they have taken on increased importance in technology ETFs.
Some market observers have even argued that Google’s increased presence in some ETFs has gone somewhat unnoticed but must be acknowledged. [Of Google and ETFs]
Apple, Google and Facebook combine almost 31% of IYW’s weight and over 24% of the new Fidelity MSCI Information Technology Index ETF’s (FTEC) weight. FTEC is the second-largest of the 10 Fidelity sector ETF’s the mutual fund giant launched in October 2013. [Fidelity ETFs off to Solid Start]
S&P Capital IQ has an overweight rating on the tech sector at large, saying it”thinks component companies have very strong balance sheets that increasingly will be used to pursue value-added R&D, M&A, buybacks, dividends and debt retirement.”
The tech sector has been one of the leading sources of S&P 500 dividend growth over the past several years. However, because dividend growth in the sector is a relatively new phenomenon, many ETFs that focus on dividend increase streaks are light on tech exposure.
Investors can grab pure play exposure to rising tech dividends via the First Trust NASDAQ Technology Dividend Index Fund (TDIV) . Proving the potency of dividends and tech under one umbrella, TDIV has amassed $408 million in assets in just 20 months of trading. [Dividend Growth With ETFs]
Technology Select Sector SPDR
Tom Lydon’s clients own shares of Apple, Google and Facebook.