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3 ETFs Leading the Technology Sector Surge - ETF News And Commentary

Sweta Killa

After lagging for quarters, the technology sector seems back on track with improving fundamentals. This is especially true given that the total earnings for 95.8% of the sector’s total market capitalization are up 13.3% on 8.5% revenue growth with beat ratios of 70.7% and 55.2%, respectively.


In fact, the sector’s earnings growth is more than twice that of the S&P 500 for Q4, representing the best performance in almost a year. Further, it is expected to outperform the broad market index over the next three quarters given its robust growth rate of 0.9%, 3.5%, and 6.97% for Q1, Q2 and Q3, respectively, versus the S&P 500 negative growth of 3.6% and 3.4% for Q1 and Q2 and growth of 0.6% for Q3.


The expectation of outperformance has spread an air of optimism in the entire sector. Now let’s dig into some of the strength and weakness of the sector that could materially impact the bottom line in the coming quarters.


Strengths


The impressive growth of the sector largely hinges on Apple’s (AAPL) blockbuster first-quarter fiscal 2015 results that brought in astounding $18 billion in earnings, about $5 billion more than the year-earlier period. This technology giant is riding high on the success of the bigger-screen iPhones 6 and 6 plus as well as robust sales in China and accounted for 29.6% of the sector’s total earnings in Q4. Notably, Apple accounts for 19.4% of the total market capitalization of the entire technology sector in the S&P 500 index (read: Apple Crosses $700B Mark: 3 ETFs to Ride the Uptrend).


Most of the tech companies have huge cash piles on their balance sheets and are in a position to increase payouts to shareholders. These companies will not face any financing problem in a rising interest rate environment due to their cash reserves. Notably, technology has been the highest dividend-paying sector in the S&P 500. Additionally, a strengthening economy and better job prospects will provide a further boost to the economically sensitive growth sectors like technology, which typically perform well in a maturing economic cycle.


Further, growing demand for novel and advanced technologies such as cloud computing, big data, smartphones, high-speed fiber networks, and the Internet of Things will continue to fuel growth in the entire sector (read: Bet on These Top Ranked Tech ETFs for Outperformance).  


Weakness


A strong dollar, political uncertainty in Russia and Brazil, as well the threats of global slowdown will continue to weigh on the revenues and profitability of the big tech companies.


New ETF Leadership


While all the ETFs in the tech space have given handsome returns from a year-to-date look given encouraging fundamentals, funds targeting some niche strategies are crushing the broader space and a few actually added more than double digits. Below, we have highlighted four funds that deserve a closer look and will continue their outperformance in the coming months:  


PureFunds ISE Cyber Security ETF (HACK)


The fund offers exposure to the companies that ensure the safety of computer hardware, software, networks, and fight against any sort of cyber malpractice. It tracks the ISE Cyber Security Index, holding 30 securities in its basket. It is pretty well spread out across components, as each security holds no more than 6.61% of total assets. CyberArk Software (CYBR), Fireeye (FEYE) and Qualys (QLYS) occupy the top three positions in the basket (read: Cyber Security ETF Fired Up on Blowout Earnings).


From an industrial look, software and programming accounts for nearly two-thirds of the portfolio while communication equipment and Internet mobile applications round off the top three. In terms of country exposure, U.S. firms take the top spot at 70%, followed by Israel (14%), the Netherlands (5%), South Korea (4%), Japan (4%), Finland (3%) and Canada (1%).


The fund has been getting the first-mover advantage and has accumulated $320.5 million in AUM in just three months of its debut while charges 75 bps in fees per year. Average daily volume is solid as it exchanges nearly 312,000 shares in hand. The ETF surged 11.6% in the year-to-date timeframe.


ARK Web x.0 ETF (ARKW)


This is an actively managed fund focusing on companies that are expected to benefit from the shift of technology infrastructure from hardware and software to cloud enabling mobile and local services. These companies will primarily be either developers or users in fields such as cloud computing, wearable technology, big data, cryptocurrencies, social media, services and data mining, Internet of Things and digital education.

 

The fund holds 42 stocks in its basket with none holding more than 5.6% of total assets. Netflix (NFLX), Twitter (TWTR) and Athenahealth (ATHN) are the top three holdings. From a sector look, Internet & mobile applications as well as software & programming collectively make up for nearly three-fifths of the portfolio while Internet & catalogue retail and semiconductors round off the next two spots with double-digit exposure each (read: 3 New, Cutting Edge ETFs Shooting Higher).


The ETF is almost five month old with AUM of $10 million and average daily volume of less than 3,000 shares. Expense ratio came in at 0.95%. The fund has added about 9% so far this year.


First Trust Dow Jones Internet Index (FDN)


This is one of the popular and liquid ETFs in the space with AUM of over $2.3 billion and average daily volume of about 326,000 shares. The fund targets the Internet corner of the broad tech space by tracking the Dow Jones Internet Composite Index and charges 57 bps in fees per year.


In total, the fund holds a basket of 42 securities with the largest allocation going to Amazon.com (AMZN) and Facebook (FB) with 8.3% and 7.9% share, respectively. Other firms do not hold more than 5.34% of assets. From a sector look, Internet mobile applications account for 57% share, closely followed by Internet retail (24%). The ETF has added 7.7% so far in the year (see: all Technology ETFs here).





Bottom Line


With growth expectations outpacing the S&P 500 for the next three quarters, the technology sector is set to move higher and the above-mentioned innovative ETFs seem the best ways to tap the new leadership and growing niche areas in this space.


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PURFDS-ISE CYBR (HACK): ETF Research Reports
 
ARK- WEB XO ETF (ARKW): ETF Research Reports
 
FT-DJ INTRNT IX (FDN): ETF Research Reports
 
APPLE INC (AAPL): Free Stock Analysis Report
 
FACEBOOK INC-A (FB): Free Stock Analysis Report
 
AMAZON.COM INC (AMZN): Free Stock Analysis Report
 
TWITTER INC (TWTR): Free Stock Analysis Report
 
NETFLIX INC (NFLX): Free Stock Analysis Report
 
CYBER-ARK SFTWR (CYBR): Free Stock Analysis Report
 
FIREEYE INC (FEYE): Free Stock Analysis Report
 
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