By Todd Rosenbluth, CFRA
Heading into the first quarter 2017 earnings season, the S&P 500 information technology sector was expected to report earnings growth of 16.2% according to S&P Capital IQ consensus estimates as of April 12, representing the highest growth in the index after energy and ahead of the S&P 500’s 9.7%. While, energy is projected to bounce back from a prior loss, technology is likely to be a top three growth leader for the S&P 500 index for the third quarter in a row, according to Lindsey Bell, an investment strategist at CFRA Research.
Bell highlights that the semiconductors and semiconductor equipment industry is likely to be the driver in the first quarter, with a 39.4% projected growth rate. CFRA equity analysts cover 54 US stocks within the industry and have 24 strong buy or buy recommendations. Other industries expected to experience double-digit growth for the quarter include Internet software & services (28.3%) and electronic equipment & instruments (18.8%).
Technology Select Sector SPDR (XLK) and Vanguard Information Technology (VGT) are the two largest and technology focused ETFs, with $17 billion and $12 billion in assets, respectively, However, there are holding differences between them, as XLK has some telecom exposure, while VGT has more small- and mid-cap exposure. Yet, both these market-cap weighted ETFs have a double-digit percentage of assets in CFRA strong buy recommended Apple (AAPL). As such, a hefty ~17% of assets are weighted to the technology hardware, storage & peripherals industry because of Apple’s size and regardless of its other fundamental attributes.
Guggenheim S&P 500 Equal Weight Technology (RYT) holds 67 S&P 500 tech stocks, but rather than being dominated by AAPL and other tech heavyweights such as Microsoft (MSFT) and Facebook (FB), RYT has a roughly equal weighting in more moderately sized tech companies. For example, semiconductor and semiconductor equipment companies (22% of recent assets) were well represented, including Broadcom (AVGO) and KLA-Tencor (KLAC) and comprised a larger weighting than technology hardware storage & peripherals (11%). RYT has a 0.40% net expense ratio and $1.2 billion in assets.
While PowerShares DWA Technology Momentum Portfolio (PTF) is also rebalanced on quarterly basis, it aims to identify tech companies that are showing relative strength and is reconstituted every three months. Here as well, semiconductor and semiconductor equipment companies were more exposed (28% of assets) than technology hardware, storage & peripherals (12%), but stocks are not equal in positioning. Advanced Micro Devices (AMD) and Micron Technology (MU) were among the top-10 holdings with recent weightings of 4.3% and 2.6%, respectively; AAPL was the largest holding at 5.0% of assets. PTF, which tracks a Dorsey Wright index, has a 0.60% net expense ratio and has $130 million in assets.
In contrast, and using an index designed by DFA, John Hancock Multifactor Technology ETF (JHMT) combines size, value and quality attributes to build its portfolio. Semiconductor & semiconductor equipment companies (24% of assets) are again higher than technology hardware, storage & peripherals (12%), with Intel (INTC), Qualcomm (QCOM) and MU among top-10 holdings. However, MSFT and AAPL were the two largest holdings. JHML, which is rebalanced on semi-annual basis, has a 0.50% net expense ratio and $40 million in assets.
Of course, investors that want to focus solely on the semiconductor and semiconductor equipment industry could look to industry specific products, including iShares PHLX Semiconductor (SOXX) or SPDR S&P Semiconductor (XSD), but they would miss out on the diversification benefits in case analysts are incorrect about the industry leading the sector’s earnings this season.