The First Trust Technology AlphaDEX Fund (NYSEArca: FXL) is among the myriad technology exchange traded funds that have recently been hitting record highs as the fund’s smart beta methodology proves advantageous for investors.
Technology companies are still sitting on cash hoards that can be deployed in ways to improve value with investors. Investors are already seeing an increase uptick in company share buybacks and tech firms are now even issuing dividends.
The sector could even see more free cash on hand if Congress proceeds with plans to cut down capital gains on repatriated earnings or follow in President-elect Donald Trump’s proposed repatriation tax holiday policy that would encourage large multi-national companies to bring back hundreds of billions of dollars in cash to the U.S. for possible use in dividends, deals or other projects. Trump plans to levy a 10% repatriation tax on U.S. companies’ overseas profits from foreign subsidiaries, compared to the current 35% tax rate.
“FXL’s underlying index, the StrataQuant Technology Index, selects member firms based on a combination of growth and value factors. Growth factors used in the selection process include price appreciation and one-year sales growth, while the value factors used include cash flow to price and return on assets,” according to Investopedia.
FXL also features other significant differences compared to traditional technology ETFs, such as the Technology Select Sector SPDR (NYSEArca: XLK) and the Vanguard Information Technology ETF (NYSEArca: VGT).
Large institutional traders may enjoy the robust liquidity found in XLK, but long-term investors who are less concerned about day-to-date, bid-ask spreads may like the cheaper 0.10% expense ratio found in VGT, compared to XLK’s 0.14% expense ratio. With FXL, investors will not find the significant weights to tech titans such as Apple (NasdaqGS: AAPL) and Microsoft (NasadaqGS: MSFT) as they will find with an ETF like XLK or VGT.
“As is the case with many smart beta strategies, a case can be made that FXL’s periods of outperforming cap-weighted rivals are attributable to the size factor. FXL’s holdings have a median market value of $10.5 billion, indicating that this is, essentially, a mid-cap fund. That figure is dwarfed by the weighted average market value of $298.4 billion found on the 75 holdings in the largest technology ETF,” adds Investopedia.
For more information on the tech sector, visit our technology category.
Tom Lydon’s clients own shares of Apple.