The Technology Select Sector SPDR (NYSEArca: XLK) is the largest exchange traded fund tracking technology, the largest sector weight in the S&P 500. Home to many of the largest technology companies in the U.S. and $10.9 billion in assets under management, XLK has been rightfully bellwether status.
However, some market observers wonder if XLK and rival ETFs, such as the Vanguard Information Technology ETF (NYSEArca: VGT), wonder if these funds are providing investors enough to exposure to true technology stocks.
It is a question worth pondering because XLK, as just one example, features telecom giants Verizon (NYSE: VZ) and AT&T (NYSE: T) as its third- and fourth-largest holdings. Said another way, AT&T and Verizon account for larger percentages of XLK and other tech ETFs than do true tech firms such as International Business Machines (NYSE: IBM) and Cisco Systems (NASDAQ: CSCO). [Look to Tech ETFs for Growth Opportunities]
“These apparent contradictions show how blurred the definition of a tech company has become in a time when nearly all businesses define themselves as one and software and digital communication are at the core of modern economies. The XLK fund simply tracks the members of the Standard & Poor’s 500 Index that are classified by S&P Dow Jones Indices as tech and telecom companies. Decades ago, a tech company pretty much meant one that made computers, computing equipment and software. But now the designation is more a judgment call,” writes Michael Santoli for Yahoo Finance.
Santoli points out that the likes of Amazon (NasdaqGS: AMZN) and Netflix (NasdaqGS: NFLX) are not found in traditional tech ETFs though they are found in Internet funds. Rather, S&P and other major index providers classify Amazon and Netflix as consumer discretionary companies. Amazon is one of the largest holdings in the Consumer Discretionary Select Sector SPDR (NYSEArca: XLY).
As Santoli notes, the SPDR Morgan Stanley Technology ETF (NYSEArca: MTK) marries old and new tech. MTK tracks the Morgan Stanley Technology Index, which is currently a mixture of “old school” and new technology companies. While the equal-weight MTK features Amazon, Netflix and LinkedIn (NYSE: LNKD) among its top 10 holdings, Apple(NasdaqGS: AAPL) is also one of the ETF’s top holdings. [Dividend ETFs for Rising Rates Protection]
SPDR Morgan Stanley Technology ETF
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.