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.