The Technology Select Sector SPDR (NYSEArca: XLK) is up 6.1% year-to-date, good for one of the better performances among the nine sector SPDR exchange traded funds. A big part of the solid performances turned in by XLK and rival technology ETFs this year is attributable to the so-called FANG stocks – Facebook (NasdaqGS: FB), Amazon (NasdaqGS: AMZN), Netflix (NasdaqGS: NFLX) and Google or Alphabet (NasdaqGS: GOOG).
While it must be noted Amazon and Netflix reside in consumer discretionary ETFs, Alphabet and Facebook are major components in standard technology ETFs, such as XLK.
In 2015, FANG stocks are collectively up 86%, and the top ten companies, which include FANG, have added 74 points or 3.6 percentage points of S&P 500 returns, writes Thomas Lee of Fundstrats for Barron’s. [ETF Trends on Fox Business]
However, Lee pointed out that top performers rarely show a repeat performance the following year. Since 2005, the top 10 stocks underperformed the following year by an average 290 basis points.
With 2016 almost here and some concerns popping up regarding the ability of the FANG quartet to repeat this year’s bullishness next year, some market observers are concerned that XLK and comparable tech ETFs are headed for near-term pullbacks.
“As mentioned, the SPDR tech ETF has been lagging most of the month and that is in stark contrast to its leadership role over the past two years. But now with the XLK ETF backing down thanks in large part to changes in the FANGs, one of the few engines left for the market has lost its power. It’s not dead yet but when so few sectors are really carrying the load, the loss of any of them can be problematic,” reports Michael Kahn for Barron’s.
ETF investors could also begin to shift away from top heavy, market capitalization-weighted index funds for ETF options that equally weight components, like the Direxion NASDAQ-100 Equal Weighted Index Shares (NYSEArca: QQQE) and the First Trust NASDAQ-100 Equal Weighted Index Fund (NasdaqGS: QQEW).
Equal-weight ETFs do not feature the large allocations to tech titans such as Apple (NasdaqGS: AAPL) and Facebook that are found in traditional tech funds, meaning investors can experience less downside when the largest tech names retreat.
Alphabet and Facebook combine for 16.5% of XLK’s weight. Apple is the ETF’s largest holding with a weight of 14.2%.
Technology Select Sector SPDR
Tom Lydon’s clients own shares of Apple and Facebook.