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Tech ETFs To Watch After Solid Apple Earnings

Zacks Equity Research

The technology sector has been broadly mixed so far this year due to uncertainty surrounding some of the top tech players. This is because of weak overseas demand, overall reduction in global information technology spending, and a strong dollar just to name a few headwinds to global tech stocks (read: Three Tech ETFs Still Going Strong).

Last week, the technology sector was stressed by sluggish performances this earnings season from the top players such as Google (GOOG), Microsoft (MSFT), International Business Machines (IBM), Hewlett-Packard (HPQ) and Intel Corp. (INTC).

However, the technology giant Apple (AAPL), which struggled last year, seems to be back on track with better-than-expected third quarter results. Investors were apprehensive about slowing growth, falling gross margins, future product releases, and lack of any clear plan of returning additional cash to shareholders.

Now, however, these concerns seems to be easing, leaving investors feeling a little more bullish about this beaten down stock.

Apple Results in Focus

The company surpassed our estimates on both earnings and revenues on incredible iPhone sales. Apple sold a record 31.2 million iPhones in the quarter compared to 26 million in the year-ago quarter. The number was above management expectation of 26 million. In fact, the sale of iPhones soared 51% in the U.S. and 66% in Japan during the third quarter.

The ubiquitous gadget-maker reported earnings of $7.47 per share, down 19.8% year over year but beat our estimate by 16 cents. Revenues declined 0.8% to $35.3 billion but outpaced our estimate of $34.97 billion (read: 6 ETFs Beating the Market Over the Past Year).

Apple's better-than-expected top and bottom lines helped investors breathe a sigh of relief. AAPL shares, after falling 1.7% in the regular session on Tuesday, rose almost 6% in early Wednesday trading on elevated volume levels.

ETFs to Watch

Many technology-focused ETFs were struggling to hold on to gains when Apple’s share price plummeted. These ETFs have a heavy exposure to the industry giant and their returns are arguably directly related to the rise and fall of Apple (read: Tech ETFs Slump on Microsoft Earnings Miss).

Apple’s share price has tumbled more than 28% from its peak in Sep 2012 and has entered into a bearish phase since then. This trend seems to change now with the Apple’s solid third quarter results and the impressive run in its after-market share prices.

Below, we have highlighted three popular tech ETFs that are heavily invested in this technology company and look to be big movers this week and in the next, given the remarkable performance by Apple. Investors should closely monitor the movement in these funds and could catch the opportunity from any surge in the price (see more in the Zacks ETF Center):

iShares Dow Jones US Technology ETF (IYW)

This ETF tracks the Dow Jones US Technology Index, giving investors exposure to the broad technology space. The fund holds over 130 stocks in its basket with AUM of $2.3 billion while charging 46 bps in fees and expense.

Apple occupies the top position in the basket with 15.82% of assets. The product is heavily skewed towards the technology hardware and equipment segments, as these make up for more than half of the portfolio. Software and computer services take the remaining portion in the basket.

The fund lost about 2% over the past five-day period but added 7.7% in the year-to-date time frame. The product has a Zacks ETF Rank of 3 or ‘Hold’ with a ‘High’ risk outlook.

Select Sector SPDR Technology ETF (XLK)

The most popular technology ETF on the market, XLK follows the Technology Select Sector Index, and has amassed about $11.3 billion in its asset base. The fund charges 18 bps in fees per year from investors (read: Earnings Reports Will Put These 3 ETFs in Focus This Week).

In total, the fund holds about 78 securities in its basket. Of these firms, AAPL takes the first spot, making up roughly 13.15% of the assets. In terms of industrial exposure, the fund is widely spread across computer & peripherals, IT services, software, diversified telecom services, and Internet software & services that make up for double-digit allocations.

The fund returned over 9% so far this year but was down 2% in the past five-day period. XLK currently has a Zacks ETF Rank of 3 or ‘Hold’ with a ‘Medium’ risk outlook.

Vanguard Information Technology ETF (VGT)

This fund manages a $3.3 billion asset base and provides exposure to a large basket of 418 technology stocks by tracking the MSCI US Investable Market Information Technology 25/50 Index.

Again here, AAPL is the top firm with a 12% allocation while others hold less than 9% of assets. This suggests that the performance of the fund is somewhat dependent on Apple’s returns. From a sector perspective, system software, Internet software & services and computer hardware takes the largest share with 14.60% each.

VGT added 10.81% year-to-date but lost 1.83% in the past five days. The fund has a Zacks ETF Rank of 1 or ‘Strong Buy’ with a ‘Low’ risk outlook, and thus could be a solid pick for investors seeking to play the tech sector this year (read: Buy This Top Ranked Tech ETF Now).

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