Technology stocks and sector-related ETFs have outperformed this year with some technology ETFs posting gains that are more than double those of delivered by the S&P 500. The Technology Select Sector SPDR Fund (NYSEArca: XLK), the largest tech ETF, is outpacing the S&P 500 by a 2-to-1 margin.
XLK tries to reflect the performance of the Technology Select Sector Index, which is comprised of technology and telecom sector of the S&P 500. The ETF includes companies from technology hardware, storage, and peripherals; software; diversified telecommunication services; communications equipment; semiconductors and semiconductor equipment; internet software and services; IT services; electronic equipment, instruments and components; and wireless telecommunication services. Top holdings include Apple (NasdaqGS: AAPL), Microsoft (NasdaqGS: MSFT) and Facebook (NasdaqGS: FB).
Even with tech’s leadership this year, the sector may not be as expensive as some investors believe it is.
“Of the three sectors to outperform the S&P 500 year-to-date, tech is the standout, outperforming health care and materials by close to 19%,” according to State Street Global Advisors (SSgA). “This outperformance has created concern that tech has become extremely expensive. Much of the tech sector’s returns have been driven by its strong earning per share growth, while the returns for health care and materials have been driven more by multiple expansions.”
Technology companies are still sitting on cash hoards that can be deployed in ways to improve value with investors. We are already seeing an increase uptick in company share buybacks and tech firms are now even issuing dividends.
Related: In an Ongoing Rally, ETF Investors Should Review Their Market Tilts
The industry continues to grow through innovation as more shift to cloud, progress into artificial intelligence and adopt internet of all things devices. Additionally, the tech sector is the primary driver of S&P 500 earnings growth this year.
“The technology sector, which saw $1.6 billion inflows in October, was responsible for driving the bulk of earnings growth in Q3,” said SSgA. “Without technology, Q3 earnings for the S&P 500 Index would have grown at just 2%. Tech’s earnings sentiment has been strong, and the sector had the highest percentage of companies beating earnings expectations for the 6th consecutive quarter.”
For more information on the tech sector, visit our technology category.
Tom Lydon’s clients own shares of Apple, Facebook and Microsoft.