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Cisco Slump Drags Down These Tech ETFs

Eric Dutram

The California-based tech giant Cisco Systems (CSCO) has been on a tear for much of the past year, having risen by more than 50% in the time frame. This helps to reverse a long term trend in the stock, as CSCO was having significant trouble in years past, at least before this recent run.

However, while trading may have been quite good lately, this trend may soon be a memory thanks to a recent earnings report from CSCO. In the report, the company beat earnings but left investors wanting more due to a sluggish outlook for emerging markets, as well as a workforce cut of 5,000 people.

The news was ill-received by CSCO investors and the market in general, as shares were down 7% in Thursday trading following the news. Plus, volume was extremely elevated as more shares moved hands in the first hour of trading than in a normal session for the giant (read 3 Internet ETFs Leading the Tech World Higher).

CSCO Earnings in Focus

The earnings for CSCO actually came in above expectations, as the Zacks Consensus Estimate called for 47 cents of profit a share, while 49 cents a share were delivered. Meanwhile, revenues were up year-over-year as well as sequentially, led by strength in the services component of the business.

The real focus was the job cuts and the emerging market report though, as these are arguably the reasons for the plunge in Cisco shares in Thursday trading. In particular, the weakness in big emerging markets can be seen as a catalyst for the slide, as these large nations were thought to be key for future CSCO growth.

India and Mexico sales were up double digits, but Brazil and Russia were flat, while China was down about 6% for the period. This suggests that these nations may not be able to power broad CSCO growth in the future, and that the company may have to look elsewhere for earnings gains.

This is probably part of the reason for Cisco’s decision to trim their workforce. The cuts amounted to nearly 5% of the total company, suggesting that cost cutting may be the current trend, at least until huge emerging nations can turn things around (instead see Social Media ETF on Fire After String of Earnings Beats).

Market Impact

This emerging market bearishness and some gloom over the company’s outlook was obviously poorly received by investors in CSCO. The news also hurt the broad tech space since CSCO is such a bellwether for many firms in the sector.

Due to this, a number of tech companies also traded lower for the session, falling in tandem with Cisco. This is best represented by the following ETFs, as these funds give the biggest allocations to CSCO and thus could be the most in focus thanks to the report, or any future selling in the segment should expectations fall for tech in light of CSCO’s announcements:

iShares US Technology ETF (IYW)

This fund is easily the most popular on the list, as it has about $2.3 billion in assets, and average daily volume of roughly 240,000 shares. The product tracks the Dow Jones US Technology Index, focusing on U.S.-based large cap tech firms.

AAPL makes up nearly one-fifth of the portfolio, followed by MSFT and GOOG to round out the top three, together which account for about 35% of the total assets. CSCO is actually the fifth biggest stock in the portfolio, accounting for roughly 5.5% of the product (read 3 Apple-Proof ETFs).

IYW was down about 1.5% in the Thursday session, pushing the five day return just to negative territory.

First Trust NASDAQ Technology Dividend Index Fund (TDIV)

For investors looking for a dividend focus in the tech market, TDIV could be an interesting choice. The product follows the NASDAQ Technology Dividend Index, giving exposure to roughly 80 companies in the technology sector that also pay dividends.

There is a large cap focus in this product too, while the sector breakdown favors semiconductors, computer hardware, and communications equipment. Apple takes the top spot from an individual holding perspective (8.7%), while Cisco (8.6%) is close behind.

This product lost about 1.5% in Thursday trading while its five day performance is -1%.

iShares North American Tech-Multimedia Networking ETF (IGN)

For a concentrated play in the networking space, IGN could be worth a closer look. This ETF holds just 26 components, and seeks to invest in firms that produce telecom equipment, data networking or wireless equipment (see 2 Sector ETFs Surging this Earnings Season).

Although large caps account for roughly a third of the portfolio, small caps actually dominate, accounting for nearly 40%, followed by mid caps at 22% of the fund. Individual securities are led by Juniper Networks at 8.8%, while the in-focus Cisco is second at 8.75%, then Qualcomm at 8.7%.

Given its tight focus, this ETF was the most hurt in the trading day, falling by 2.4% on the session though it is down 0.6% over the past five days.

Bottom Line

CSCO was on the right track for much of 2013, and there was optimism that this streak could continue. After all, the company was seeing solid analyst estimate revisions, and the U.S. market has held up rather well.

However, the big emerging markets continue to face weakness and this has led to a troubling situation for CSCO, pushing investors to sell shares of this once-surging giant. Should these worries continue, it could spell more trouble for not only CSCO, but broad tech ETFs—and especially those counting on emerging markets-- as well.

This suggests that investors definitely need to keep an eye on the space—and emerging markets in general—to figure out if the bullish trend is coming to an end in this sector, or if further gains can still be had thanks to a stronger developed markets outlook.

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Read the analyst report on CSCO

Read the analyst report on IYW

Read the analyst report on TDIV

Read the analyst report on IGN

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