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Microsoft Drops Despite Earnings Beat: Tech ETFs to Watch

Sweta Killa

After the closing bell on Wednesday, the world's largest software maker Microsoft MSFT topped both revenue and earnings estimates when it reported fiscal second-quarter 2019 results.

Earnings per share came in at $1.10, outpacing the Zacks Consensus Estimate by a penny and improving 15% from the year-ago quarter. Revenues rose 12% year over year to $32.47 billion, topping the estimate of $32.45 billion. The outperformance reflects the company’s success in shifting its business toward Internet-based computing, which includes products such as Office 365, Dynamic 365 and the flagship Azure computing platform. This has become a major source of growth (see: all the Technology ETFs here).

However, cloud computing business is witnessing a slowdown growth. Azure sales grew 76% in the fiscal second quarter, on par with growth of 89% in the previous quarter but down from the 98% growth in the year-ago quarter. Sales of Office 365 Commercial and Dynamic 365 climbed 34% and 51%, respectively.

Despite the beat, shares of Microsoft slipped more than 4% in after-market hours on concerns about slowing cloud-services growth. Currently, Microsoft carries a Zacks Rank #3 (Hold) and has a VGM Score of C. It falls under a top-ranked Zacks industry (top 31%).

ETFs in Focus

The sluggish trading could have a huge impact on ETFs that are heavily invested in this software leader. Below we have highlighted six ETFs with a double-digit exposure to Microsoft that could see some losses in today’s trading session and are in focus post MSFT earnings.

Select Sector SPDR Technology ETF XLK

This most-popular technology ETF follows the Technology Select Sector Index and has $17.5 billion in AUM. The fund charges 13 bps in fees per year from investors and trades in heavy volume of around 16.9 million shares a day on average. It holds about 68 securities in its basket, with Microsoft occupying the top position at 18.1%. It has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.

iShares Dow Jones US Technology ETF IYW

This ETF tracks the Dow Jones US Technology Index, giving investors exposure to 151 technology stocks. Of these, Microsoft occupies the top position in the basket with 15.7% of assets. The fund has AUM of $3.6 billion and charges 43 bps in fees and expenses. Volume is good as it exchanges nearly 225,000 shares a day. The fund has a Zacks ETF Rank #1 with a Medium risk outlook (read: Top-Ranked Sector ETFs & Stocks to Buy for 2019).

Vanguard Information Technology ETF VGT

This fund manages about $17 billion in its asset base and provides exposure to 323 technology stocks. It currently tracks the MSCI US Investable Market Information Technology 25/50 Index. Here, MSFT takes the second spot with 14.8% share. The ETF has 0.10% in expense ratio, while volume is solid at nearly 792,000 shares. It has a Zacks ETF Rank #1 with a Medium risk outlook.

MSCI Information Technology Index ETF FTEC

This fund is home to 314 technology stocks with AUM of $1.9 billion. It follows the MSCI USA IMI Information Technology Index. MSFT is the second firm with a 14.3% allocation. The ETF has 0.08% in expense ratio, while volume is solid at 545,000 shares a day. It carries a Zacks ETF Rank #1 with a Medium risk outlook (read: Apple Rallies on Earnings Beat: Top-Ranked Tech ETFs to Buy).

iShares Global Tech ETF IXN

This product provides broad exposure to technology stocks from around the world by tracking the S&P Global 1200 Information Technology Sector Index. Holding 115 stocks in its basket, Microsoft occupies the top spot with 14.1% share. American firms dominate the fund’s portfolio at 77.8%. The ETF has amassed $2.3 billion in its asset base but trades in a good volume of 126,000 shares a day on average. Expense ratio came in at 0.47%.

iShares Evolved U.S. Technology ETF IETC

This is an active ETF, having accumulated $4.9 million in its asset base so far. It employs data science techniques to provide exposure to 234 technology stocks. Microsoft is the top firm with 13.4% allocation. IETC currently trades in a light volume of 6,000 shares and charges 18 bps in annual fees.

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