Top Ranked Tech ETF for Q3 Earnings Season

The technology sector, once a star performer, is missing out all the fun this year despite the soaring equity markets. The sector has been the biggest drag on earnings growth in Q2 driven by the sluggish performances from the top players. Total earnings for the sector were down 10.1% on 0.4% revenue growth.

This trend was brought about by weak overseas demand, a reduction in global information technology spending, and a strong dollar (read: Forget Big Tech; Buy These ETFs Instead).

Moving into this coming earnings season, which is only a few days away, this trend is rebounding on improving global economic conditions. As per Zacks Estimates, the technology sector is expected to post earnings and revenue growth of 0.2% and 1.8%, respectively.

The U.S. economy is picking up at a faster pace while a slowdown in China, seen in nine of the past 10 quarters, is seemingly bottoming out. Further, the European economy is also on the verge of recovery on the back of upbeat data, less concerns on debt levels, and a firmer currency.

These improving fundamentals from across the globe would fuel growth in many tech stocks, leading to a surge in many ETFs tracking these companies. Moreover, the tech stocks seem well-positioned going forward as cloud computing and mobility segments are gaining importance and offering new avenues for growth.

Investors seeking to tap the growing technology sector with lower risk should focus on top ranked ETFs in the sector. One way to find a top ranked ETF in the tech space is by using the Zacks ETF Ranking system (read: Zacks ETF Rank Guide).

About the Zacks ETF Rank

A look at the top ranked tech ETFs can be done by using the Zacks ETF Rank. This technique provides a recommendation for the ETF in the context of our outlook of the underlying industry, sector, style box or asset class. Our proprietary methodology also takes into account the risk preferences of investors.

The aim of our model is to select the best ETFs within each risk category. We assign each ETF one of five ranks within each risk bucket. Thus, the Zacks ETF Rank reflects the expected return of an ETF relative to other ETFs with a similar level of risk.

Using this strategy, we have found one ETF – First Trust NASDAQ-100-Technology Sector Inde (QTEC) – in the space that has a Zacks ETF Rank of 2 or ‘Buy’ rating with a ‘Medium’ risk outlook. The details of this interesting fund are highlighted below (read: all the Top Ranked ETFs):

QTEC in Focus

This overlooked product offers broad exposure to the tech sector of the U.S. equity market by tracking the performance of the NASDAQ-100 Technology Sector Index. The fund holds a small basket of 42 securities in equal weights (read: Overweight These Equal Weight ETFs in Your Portfolio).

The best thing about the equal weight approach is that performance is not heavily dependent on the returns in a particular stock or group of securities. Further, with quarterly rebalancing, equal-weighted funds tend to cash out on the overvalued segments and reinvest in the underperforming ones, potentially allowing for a more balanced approach.

The top three holdings include Facebook (FB), Baidu (BIDU) and Cognizant Technology (CTSH) and none of the securities in the basket accounts for more than 3.9% of total assets. The product has a certain tilt towards the large cap and growth stocks as about three-fourths of the portfolio falls in the large cap category while about 56% is classified as growth.

From a sector look, more than one-third share is allocated to semiconductors while software and Internet take decent allocations of 25.62% and 14.32% in the portfolio (read: Time to Buy This Top Ranked Semiconductor ETF?).

While the ETF will have to go a long way in reducing overall risk, it charges a higher expense ratio of 60 bps compared to the fundamentally/capitalization weighted counterpart. The fund has so far managed $146.1 million in its asset base and trades in a small volume of roughly 25,000 shares per day. This suggests that bid/ask spreads are somewhat wide and that total costs may be higher than the stated expense ratio.

In terms of performance, this fund has participated in the broad market rally despite the disappointing performance of the sector so far this year. QTEC added nearly 21.4% year-to-date, easily crushing the broad tech fund (XLK) and U.S. market fund (SPY) by wide margins (see more in the Zacks ETF Center).

Further, the ETF is up nearly 28% over the trailing one-year period and 47% over the past three years.



Bottom Line

This ETF has been overlooked by investors in the tech space, though it has delivered strong returns this year amid the broad weakness in the sector. However, the fund is a bit costly while volume isn’t great, but neither should be a big problem considering its performance history (see: all the Technology ETFs here).

The product has the potential to deliver outsized returns further in the months ahead as global conditions are improving and spending on IT is on the rise. This makes QTEC an ideal choice for investors seeking higher returns from the coming Q3 earnings season, and especially so in the technology segment.

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