By Todd Rosenbluth, CFRA
Last week, CFRA’s Investment Policy Committee became more bullish on the energy and technology sectors as part of a diversified U.S. equity portfolio. Those sectors replaced the previously favored health care and financial sectors, which were simultaneously downgraded to marketweight. Investors who want to leverage our recommendations using top-rated ETFs and mutual funds have an array of choices.
CFRA has Buy or Strong Buy recommendations on 31 U.S. energy stocks, including Chevron (CVX), ConocoPhillips (COP) and Valero Energy (VLO). Investors who want a more diversified index-based approach to the sector should look to Energy Select Sector SPDR (XLE) and Vanguard Energy Index ETF (VDE). While XLE only holds large-cap stocks in the sector, VDE also includes mid- and small-cap energy stocks. For actively-minded investors, Tortoise MLP & Pipeline Fund (TORTX) is one of the various CFRA five-star rated mutual funds. CFRA likes what’s inside, including Kinder Morgan (KMI) and Williams Companies (WMB).
CFRA has Buy or Strong Buy recommendations on 61 U.S. technology stocks across an array of industries, including Apple (AAPL), Alphabet (GOOGL), Cisco Systems (CSCO) and Oracle (ORCL). Investors can look to Fidelity MSCI Information Technology (FTEC) and Technology Select Sector SPDR (XLK) for an index-based approach as both hold the previously listed large-cap tech stocks. Meanwhile, Red Oak Technology Select Fund (ROGSX) is an example of an actively-managed tech-focused mutual fund.
In rating ETFs and mutual funds, CFRA combines holdings-level analysis with fund attributes. CFRA’s sector recommendations are not a direct driver of our ratings. But the likely future prospects of underlying holdings very much are. We think investors need to look forward, not just backward, when sorting through the array of fund choices.
Energy & Tech Challenges
ETF investors seeking a more sector diversified approach but wanting high exposure to energy and technology sectors will find challenges.
Technology stocks tend to be more represented in growth or momentum-oriented ETFs, while the energy weighting is limited here. By contrast, energy stocks are easily found in value or high dividend yielding funds, where tech stocks are less likely to reside. For example, Vanguard Growth Index ETF (VUG) and iShares Edge MSCI USA Momentum (MTUM) have 33% and 36% in tech stocks, but just 3.5% and 2.0% to energy. In contrast, SPDR S&P Portfolio Value (SPYV) and iShares Core High Dividend (HDV) has 20% and 11% in energy stocks, respectively, with just 7% in technology each.
However, CFRA found some ETFs that recently offered a double-digit weighting in both sectors. These include PowerShares FTSE RAFI US 1000 Portfolio (PRF) and Schwab Fundamental US Large Company Index ETF (FNDX). Both ETFs hold AAPL and CVX among their top-10 holdings, along with CFRA hold-recommended Exxon Mobil (XOM) and Microsoft (MSFT). The ETFs are constructed based on valuation and dividend criteria, though FNDX also includes a focus on share buybacks.
Todd Rosenbluth is Director of ETF & Mutual Fund Research at CFRA.