Apple (NasdaqGS: AAPL) continued doing Apple things Tuesday, notching a modest rise after the stock touched another all-time high earlier in the day.
Year-to-date, shares of Apple are up nearly 16%, making the stock just one of 59 S&P 500 members that are up at least 10% this year. An impressive showing to be sure, but not one that has stoked interest in Apple-heavy exchange traded funds.
Apple’s ballooning market capitalization, one that has the stock’s footprint growing in several well-known ETFs, is not helping those ETFs add assets. In fact, flows data suggest ETF investors are missing out on Apple’s rally and broader tech sector strength. Notably, the size of outflows from tech sector ETFs with large Apple allocations indicate it is professional investors that are missing the boat outperforming tech ETFs. [Finally, Some Love for a Big Tech ETF]
Apple has helped propel the Technology Select Sector SPDR (NYSEArca: XLK), the largest tech sector ETF, to a gain of 3.2% percent this year, or about 120 basis points better than the S&P 500. XLK had an 18% weight to Apple as of Feb. 16, up from 16.5% on Jan. 27, but that has not stopped investors from pulling $657.5 million from the ETF. [Apple’s ETF Impact]
That is an extension of a theme that started last year. XLK gained 17.8% in 2014, topping the S&P 500 by 430 basis points, but investors mistakenly yanked $1.5 billion from the ETF. XLK is not alone in the “large Apple weight, lost assets” ETF club.
The iShares U.S. Technology ETF (NYSEArca: IYW) had an Apple weight of just under 19% heading into Jan. 27. That weight has since grown to almost 20.6%, helping the ETF perform in-line with XLK this year. However, investors have been even more ruthless with their departures form IYW than they have with XLK, pulling $1.7 billion from the former this year as of Feb. 16.
Even when ignoring that these departures coincide with Apple’s seemingly never-ending rise, they are ill-timed for other reasons. For example, tech is looking more like a value sector, not the over-inflated, richly valued group investors remember from 1999 and 2000.
“Tech seems to have become a new Value sector. Growth has slowed, but long-term growth forecasts still far exceed those for the S&P500 while margins & ROE remain impressively high. Unlike many sectors valuations have not drifted much higher since 2009. As a result, Tech now trades at a P/E discount to the S&P500 whereas historically it has enjoyed a premium. We think Tech appears relatively attractive at these levels,” according to AltaVista.
Based on 2015 estimates, the S&P 500 trades at 16.4 times earnings, but XLK is at 15.8 times this year’s expected earnings. On the basis of price to earnings growth and price to free cash flows, XLK is also slightly less expensive the S&P 500, according to AltaVista data. [Charts Say Tech ETF Rally is Coming]
Technology Select Sector SPDR
Tom Lydon’s clients own shares of Apple.