The latest tech earnings season has already kicked off, but many high-profile mega-cap growth companies will report results this week. We believe the data and forward-looking insights are important for not just advisors who own individual stocks, but also those who own more diversified ETFs. How much it matters depends upon what ETFs are owned, especially in the tech sector.
Alphabet and Microsoft are slated to report results on October 25, Meta Platforms (formerly Facebook) on the 26th, followed by Apple and Amazon.com on the 27th. While these companies are often all referred to as technology companies, in the ETF industry it matters how a company is classified by the index providers behind the funds.
The Technology Select Sector SPDR ETF (XLK) tracks a market-cap index of S&P 500 constituents in the information technology sector, as classified by GICS. The ETF owns 20%-plus positions in Apple and Microsoft, due in part to their relative sizes compared to fellow constituents Broadcom, NVIDIA, and Visa. However, the other mega-caps listed above are not part of the portfolio, nor are they found in the Vanguard Information Technology ETF (VGT), which tracks another GICS-based multi-cap information technology index offered by MSCI.
That’s because Alphabet and Meta Platforms are classified as communications services companies in the GICS structure. Stakes in these companies represent 10%-plus of the assets for the Communications Services Select Sector SPDR ETF (XLC), with companies like AT&T, Comcast, and Walt Disney adding some portfolio diversification.
So where does an advisor find Amazon.com in an ETF? One place is the Consumer Discretionary Select Sector SPDR (XLY), which has a 20%-plus weight in the company and a nearly as large a stake in Tesla. McDonalds, Nike, and Starbucks are other top positions.
In the first nine months of 2022, information technology sector ETFs gathered $6.2 billion, even as investors redeemed $1.1 billion in the third quarter. In contrast, consumer discretionary and communications services sector ETFs had net outflows of $8.4 billion and $1.8 billion for the calendar year. In 2022, investors have favored the more defensive sectors such as healthcare ($9.8 billion of net inflows), utilities ($6.7 billion), and consumer staples ($6.6 billion).
The above exposure to growth stocks might lead you to ask two questions: “What if I want to own all five of these companies in an ETF?” and “What if I don’t want 10% stakes in any of these companies in an ETF?”
If you want all five of these companies, the Invesco QQQ Trust (QQQ) or the lower-cost Invesco NASDAQ 100 ETF (QQQM) are a couple of ETFs to consider. These ETFs own Alphabet, Apple, Amazon.com, Meta Platforms, and Microsoft as top-10 holdings, along with NVIDIA and Tesla as all are listed on the Nasdaq exchange. In addition, some ETFs with growth in the name may be a good option. For example, the Vanguard Growth ETF (VUG) and the iShares S&P 500 Growth ETF (IVW) own all five of the companies.
Meanwhile, some advisors might want to stick with GICS structure, but prefer more diversification away from Apple and Microsoft. For them, the Invesco S&P 500 Equal Weight Technology ETF (RYT) is a strong choice. No position in the ETF represents more than 2% of assets, and recently moderately sized technology companies like DXC Technology and Micron Technology were slightly larger positions than Apple and Microsoft.
There’s also an ETF, the Direxion NASDAQ-100 Equal Weighted ETF (QQQE), which owns all five of the mega-cap companies found in QQQ and QQQM, but without the companies playing an outsized role. The largest positions in QQQE were recently Amgen and Biogen, both below 1.5% of assets.
As you prepare to track earnings season for mega-cap growth companies, make sure you know which companies matter most to your portfolio.
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