It was a prominent theme in 2014, though not one widely embraced by many exchange traded fund investors, but old school technology companies worked and did so in significant fashion.
Amid various bouts of volatility and routs for Internet and social media funds, ETFs with an emphasis on the tech sector’s old guard shined bright. That includes the iShares U.S. Technology ETF (NYSEArca: IYW), which jumped 19.5% in 2014, topping the S&P 500 by 600 basis points in the process.
Tech analysts point to sturdy tech names like Apple (NasdaqGS: AAPL) and Microsoft (NasdaqGS: MSFT), well-established companies that generated steady growth. Apple and Microsoft combine for 29.6% of IYW’s weight and the ETF’s 18.5% Apple allocation is one of the largest among ETFs that hold shares of the iPhone maker. [Tech ETFs Provide Sturdy Growth]
Old tech and IYW could repeat last year’s heroics in 2015.
“I like mature technology companies—think large established brands like Intel (NasdaqGS: INTC), IBM (NYSE: IBM) and Oracle (NYSE: ORCL). These companies can use healthy cash balances to unlock shareholder value, are more likely to fare well if the Fed starts raising rates as expected this year and stand to benefit from continued improvement in the U.S. economy,” said BlackRock Global Investment Strategist Heidi Richardson in a recent note. [Time to Upgrade Your Tech?]
Intel, IBM and Oracle combine for 13.7% of IYW’s weight. Tech’s durability in rising rates environments is an important consideration, particularly at this point in an aging bull market and amid expectations that the Federal Reserve will boost rates later this year.
“Dispersion between sector valuations should continue to grow. For example, technology stocks appear attractive based on both forward and trailing P/E ratios when compared with their long-run histories. In contrast, the utilities sector, which many have used as a bond substitute, looks expensive on both measures,” said J.P. Morgan Asset Management in a research piece out earlier this year. [Cyclical Sector ETFs Could Shine in 2015]
Tech’s increased credibility as a legitimate dividend destination also boosts the allure of ETFs like IYW. In 2014, the average dividend increase from Apple, IBM, Cisco (NasdaqGS: CSCO) and Qualcomm (NasdaqGS: QCOM) was 14%. Importantly, the tech sector has ample room for dividend growth.
“Some industry-leading companies have been hoarding cash. Consider that four information-age bellwethers―Apple, Microsoft, Google and Cisco―possess a combined $345 billion in cash. And the overall tech sector holds more than half of total corporate cash reserves in the U.S.,” adds Richardson. “With strong balance sheets, these companies are well-positioned to deliver returns through share repurchases, dividend increases and mergers and acquisitions.”
The $4.5 billion IYW has a trailing 12-month yield of 1.13%.
iShares U.S. Technology ETF
Tom Lydon’s clients own shares of Apple.