The technology sector has had its share of star performances this year. Shares of Dow component Microsoft (NasdaqGM: MSFT) are up 35.3% while Internet search giant Google (NasdaqGM : GOOG) has surged 54%.
Still, the Technology Select Sector SPDR (NYSEArca: XLK) and comparable ETFs, for much of this year, have traded at valuations that would indicate tech is neither expensive nor on the cusp of another bubble. In fact, while XLK is approaching a 26% gain for 2013, that performance is middling relative to the nine sector SPDR ETFs. XLK ranks fifth for 2013 returns behind its discretionary, health care, industrial and financial services counterparts. [Embrace Cyclical ETFs in December]
However, technology shares look to be finishing the year on a strong note, and that has forced the trailing 12-month P/E ratio on XLK to its highest levels of the year, as Bespoke Investment Group points out.
Near 18.2, XLK’s trailing 12-month P/E resides at its loftiest levels of 2013. Earlier this month, S&P 500 technology sector had a forward 12-month P/E of 14.7, above its five-year average of 13.6, but below the 10-year average of 16.8. That made the sector less expensive than the S&P 500 along with the utilities, health care and consumer staples sectors, just to name a few. [Financial Services ETFs Get no Respect]
As of Dec. 24, XLK sported a FY 1 P/E ratio of 15.88, up from 15 earlier this month, according to State Street data.
In a sign of just how pricey it is to play defense, the Consumer Staples Select Sector SPDR (NYSEArca: XLP) has a P/E of nearly 18.4. At 15.88, XLK is barely more expensive than the Utilities Select Sector SPDR (NYSEArca: XLU).
Rising valuations on XLK and its holdings may be justifiable if interest rates continue to rise. Earlier Thursday, 10-year Treasury yields topped 3%. A host of sectors could be adversely affected by further upside for Treasury yields, but along with industrials and discretionary, tech is one of the best-performing sectors in rising rate environments.
Technology Select Sector SPDR
ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of Google and MSFT.