Buoyed by Apple’s (NasdaqGS: AAPL) rise to a market valuation of over $727 billion, technology sector exchange traded funds are extending their outperformance of broader benchmarks.
For example, the Technology Select Sector SPDR (NYSEArca: XLK), the largest technology sector ETF, is up 1.1% year-to-date, more than double the modest 0.47% gain turned in by the S&P 500. XLK’s outperformance of the S&P 500 is not new. The tech ETF topped the benchmark U.S. index by 430 basis points last year, though many investors missed out on that rally.
Investors pulled $1.53 billion from XLK last year. To put number into perspective, only seven ETFs saw greater outflows in 2014 and six of those funds either finished the year lower or badly lagged the S&P 500. [Tech ETFs Provide Sturdy Growth]
With Apple, XLK’s largest holding with a weight of nearly 18%, seemingly on an indomitable run to a $1 trillion market cap, now is not the time for investors to be shying away from tech ETFs.
Ari Wald, head of technical analysis at Oppenheimer & Co. told Lawrence Lewitinn of CNBC that XLK is his favorite sector ETF, adding that the fund “It looks good near-term, and it looks good long-term.”
Add to that, there is value in tech because the sector is undervalued relative to the S&P 500.
“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.
For now, XLK’s near-term fortunes are likely to be determined by Apple. XLK is a market cap-weighted ETF, so as Apple’s market value increases, the stock’s footprint in XLK does the same. On Jan. 27, the day Apple reported fiscal first-quarter results, XLK entered the day with a 16.5% weight to Apple. At Tuesday’s close, XLK’s Apple allocation had ballooned to 17.7%, 900 basis points above the ETF’s weight to Microsoft (NasdaqGS: MSFT), its second largest holding. [Apple’s ETF Footprint on the Rise Again]
“We’ve broken out to the upside. I see this as a big secular turnaround with a very big base to help incite further outperformance in the years ahead,” said Wald of XLK to CNBC.
Technology Select Sector SPDR
Tom Lydon’s clients own shares of Apple and Microsoft.