Earnings Season Can Be Confusing for Advisors | ETF Trends

Last week was a big week for tech earnings, with many of the largest U.S. companies reporting second quarter results and in some cases offering guidance for what’s ahead in the second half. Advisors who have embraced ETFs benefit from diversification that reduces the impact if one company misses (or exceeds) expectations.

However, some of the largest sector ETFs are market cap-weighted and are heavily weighted to a couple of companies. The confusing part is that while “tech company” is the phrase often used to describe Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Tesla, and others, only a handful are actually owned by ETFs with technology in the name. 

In 1999, MSCI and S&P Dow Jones Indices developed the Global Industry Classification Standard (GICS), seeking to offer an efficient investment tool to capture the breadth, depth, and evolution of industry sectors. The majority of assets in single-sector ETFs track indexes from either MSCI (Vanguard and Fidelity) or S&P Dow Jones Indices (State Street Global Advisors and Invesco) that follow the GICS framework, but sector ETFs from some (iShares) track indexes from FTSE Russell, which uses a unique Industry Classification Benchmark (ICB) approach that launched in 2005. In all of these ETFs, a company is only in one sector, not multiple ones, but perhaps not always the one that you would think.

For example, Apple and Microsoft can be found in all of the following ETFs: the Vanguard Information Technology ETF (VGT), the Technology Select Sector SPDR (XLK), the iShares U.S. Technology ETF (IYW), the Fidelity MSCI Information Technology ETF (FTEC), and the Invesco S&P 500 Equal Weight Information Technology ETF (RYT). While the first four are market cap-weighted, resulting in double-digit percentage-of-asset stakes in Apple and Microsoft, RYT is more diversified at the security level and has less than 2% of assets in each position regardless of its size.

However, IYW is the lone technology ETF of the quintet to own Alphabet and Meta Platforms. This is because in the GICS framework, Alphabet and Meta Platforms are communications services companies, not technology ones as they are in ICB. 

Shares of Alphabet and Meta Platforms can be found in the Communication Services Select Sector SPDR (XLC), the Vanguard Communications Services ETF (VOX), the Fidelity MSCI Communications Services Index ETF (FCOM), and the Invesco S&P 500 Equal Weight Communications Serviced ETF (EWCO); EWCO again is more diversified at the stock level, with relatively small positions in the mega-cap companies. Since they are in IYW, Alphabet and Meta Platforms are not part of the iShares U.S. Telecommunications ETF (IYZ). IYZ’s top positions are Verizon Communications, Comcast, and Cisco Systems, the last of which is an information technology company, per GICS, and found in VGT, XLK, etc.

Below is a cheat sheet, since this can be confusing.

The impact of these unique portfolios can be seen when looking at performance. Focusing initially on technology-named ETFs, RYT and XLK contracted less than IYW year-to-date through July 27 (19% each vs. 24%). 

Meanwhile, among communications services/telecommunications ETFs, IYZ was down 20%, a significantly narrower loss than VOX’s 27%. But EWCO held up even better, down just 19%. 

Thankfully, there is agreement for GICS and ICB that Amazon.com and Tesla are consumer discretionary companies, not technology ones. Both can be found in S&P-based ETFs like the Consumer Discretionary Select Sector SPDR (XLY), MSCI-based ones like the Vanguard Consumer Discretionary ETF (VCR), and FTSE Russell-based ones like the iShares U.S. Consumer Discretionary ETF (IYC).

With sector investing, the devil is in the details, and no two ETFs are the same. So before celebrating or worrying about earnings season, make sure you know what you own for your clients.

To see more of Todd’s research, reports, and commentary on a regular basis, please subscribe here.

For more news, information, and strategy, visit the Portfolio Strategies Channel.