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Lagging Tech Sector ETFs Need Apple Turnaround


Popular technology ETFs such as PowerShares QQQ (QQQ) are in the green for 2013 but are badly trailing the S&P 500 with Apple (AAPL) a headwind for the sector due to its outsized weighting in the funds’ tracking benchmarks.

Tech is the worst-performing sector this year as investors shy away from cyclicals to favor defensive sectors such as consumer staples, utilities and health care.

However, Apple could help get tech ETFs back on track. The market bellwether’s shares have bounced the past week after dipping below $400. Apple shares are still off about 19% so far this year.

Apple is the largest stock in Technology Select Sector SPDR (XLK) at 13.4% of the portfolio. The tech ETF is up 6.1% year to date, compared with a gain of 12.5% for the S&P 500, according to Morningstar.

Bargain hunters could also lift the sector since U.S. technology stocks as a group have fallen to their cheapest valuations in at least seven years, according to Bloomberg News.

“Bulls say the unprecedented discount means technology stocks, which tend to lead during expansions, are too cheap to pass up as the world economy grows,” Bloomberg reports. “Bears say the shares will remain the worst-performing group in the S&P 500 this year with companies and governments spending less on technology as growth weakens in Europe and China.”

XLK, the tech fund, is one of nine sector ETFs that carve up the S&P 500. It has one of the cheapest valuations based on forecasted fiscal year earnings per share. Consumer Staples Select Sector SPDR (XLP) is the most expensive with a P/E of 17.7, according to State Street Global Advisors data.

The chart below shows the year-to-date performance of the nine sector ETFs, using the S&P 500 as the baseline.


Full disclosure: Tom Lydon’s clients own AAPL and QQQ.