Technology-sector ETFs have been on a tear this year, outpacing the S'P 500 index with double-digit gains, but that upward trend seems to be running low on steam, and many investors are reallocating assets into other sectors such as financials.
The change in momentum seems to be largely tied to Apple, though disappointing earnings from Google and IBM only serve to underscore how the Apple-heavy tech sector is suffering from weakening global growth.
Google's disappointing earnings, which were released accidentally during Thursday's trading session instead of after it, sent the company's shares down 9 percent. Google is the second-biggest technology company by market value. So Google now joins Apple, the biggest tech company, in dragging down tech ETFs.
Apple's stock price of the technology giant was trading as high as $705 a share about a month ago, but has since given up nearly 8 percent in value as the market came to terms with what it perceived as disappointing sales figures. Apple closed at $644.61 a share Wednesday.
Those funds have slipped nearly 3 and 4 percent, respectively, in the past month alone. By comparison, the SPDR S'P 500 ETF (SPY) is only down 0.4 percent in the same period. Apple represents roughly 20 percent of both QQQ and XLK’s portfolio, an allocation that allows the tech giant to have an undue impact on these funds.
What’s more, the drop in value in these funds has come hand in hand with sizable asset outflows. Indeed, both QQQ and XLK ranked among the week’s biggest redemptions in the five-day period ended Thursday, Oct 11. Investors yanked more than $1.1 billion out of QQQ and nearly $595 million from XLK, according to data compiled by IndexUniverse.
“People make stock-specific decisions because of Apple’s weight in these portfolios,” Paul Weisbruch of Street One Financial told IndexUniverse.
Apple’s stellar rally that had earned the company’s stock price gains of more than 60 percent in 2012 left a lot of investors with embedded gains in the stock, Weisbruch said, something that caused many to want to get out of the position now that the stock has corrected some.
“Some people are sitting on fairly nice gains if they’ve held the stock since the spring when it was in the $500s,” Weisbruch said.
He added that a lot of the redemptions taking place are also tax-related as the calendar year nears its end, a trend that should pick up pace in the next several weeks, especially for funds that have hefty allocations to a single stock as hot as Apple, he said.
“But investors aren’t racing out of the market and into cash,” he added. On the contrary, they are reallocating their money.
Financial ETFs, Smart Beta Funds Gain On Apple Jitters
Financial sector funds have been particularly popular these days as they rally to test multimonth highs, Weisbruch noted.
ETFs like the Financial Select SPDR ETF (XLF) and the iShares Dow Jones US Financial Index Fund (IYF) are indeed garnering investor attention. In the past five days alone, XLF and IYF have each gained roughly 2 percent.
The $8.36 billion XLF ranked as the sixth-most-popular fund in the week ended Thursday, Oct. 11, with net inflows of nearly $152 million. All in all, XLF has hauled in a net of $823 million in the past month. IYF has picked up a net of $15 million in the same period, according to data compiled by IndexUniverse.
Another group of ETFs that could be poised to attract some of these reallocated dollars are tech funds that weight securities based on fundamentals or other quantitative measures, also known as smart beta funds, Weisbruch said.
Those who don’t want to bail out on owning Apple, but who also don’t want a single company to overrun the portfolio’s performance, might find that equally weighted or other alternative-weighting strategies work well for them.
Funds like First Trust’s Technology AlphaDex Fund (FXL) as well as PowerShares’ Dynamic Tech Sector ETF (PTF) could emerge indeed as solid alternatives to those who want to own stocks like Apple, he noted.
Apple currently represents roughly 1.9 percent of FXL’s portfolio, while PTF allocates 2.5 percent to the tech giant.
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