It’s amazing how tech- and Internet-dependent we’ve become. I remember when cell phones were actually used to make phone calls and sending someone a birthday card required a stamp. And I’m not that old!
For the record, I love the wonderful things my cell phone can do—I can deposit checks without going to the bank, order a ride that will appear in minutes, and am shamed if I slack off on my running schedule.
But from an investing standpoint, I am old school. I like mature technology companies—think large established brands like Intel, IBM and Oracle. 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.
Cash-fortified, low debt
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.1
With strong balance sheets, these companies are well-positioned to deliver returns through share repurchases, dividend increases and mergers and acquisitions. In fact, some activist investors have been pushing them in this direction, and share buybacks by S&P 500 tech companies started to accelerate in 2014.
These mature companies have also shown responsibility in taking on debt, so they should be less vulnerable to the anticipated rate hike by the Federal Reserve.
Capex beneficiaries
Tech is also poised to reap the benefits of continued economic improvement. Capital expenditures (capex), which is the investment in property and equipment by companies, is expected to increase for U.S. companies across the board. We anticipate that much of this investment will be used to upgrade corporate hardware, software and networking systems. On the consumer side, improving purchasing power, partly due to lower oil prices, may be a boon to companies like Apple.
How to get tech savvy
One way to capture this opportunity is the iShares U.S. Technology ETF (IYW). Here’s why we think it could a wise choice for investors who have determined that tech is a suitable allocation:
- Provides pure technology exposure. IYW currently has about 99% exposure to information technology stocks. Some other popular technology funds include telecom stocks, which we consider to be a separate asset category. Telecom companies are currently carrying more debt than information technology companies and don’t necessarily move in tandem with purer technology exposures.
- Concentrates on the cash-rich companies previously mentioned. Apple, Google, Microsoft and Cisco comprise nearly 42% of IYW. Additional tech heavyweights―such as Intel, IBM, Oracle and Qualcomm―are also represented in IYW’s top 10 holdings.
- Balances size with experience. While recent IPOs are not included in IYW, the fund does have a small allocation (about 17% currently) to established small- and mid-cap stocks, which may provide additional growth potential and diversification.
As you look to upgrade the technology in your lifestyle, don’t forget to take a look at your investments. Mature tech companies could be your next favorite download.
Heidi Richardson is a Global Investment Strategist at BlackRock, working with Chief Investment Strategist Russ Koesterich. She also leads the iThinking initiative for iShares. You can find more of her posts here.