Technology is the largest sector weight in the S&P 500 and the best-performing group in the benchmark U.S. equity index this year, a theme that has been beneficial for an array of exchange traded funds, such as the Technology Select Sector SPDR (NYSEArca: XLK), the largest technology ETF by assets, and the PowerShares QQQ (NasdaqGM: QQQ), which tracks the tech heavy Nasdaq-100 Index.
With the sector soaring, market values for individual names within the group are rising, meaning technology stocks are taking on increased importance within the S&P 500 and other major broad market benchmarks.
“The high weighting and strong performance heading into earnings season have tied the S&P 500’s performance closely to that of technology stocks, especially over the last three months. During that time period, tech had the highest correlation to the S&P at 0.87,” according to CNBC.
As of Oct. 26th, technology accounted for 23.7% of the S&P 500, or nearly 900 basis points more than the index’s allocation to financial services, its second-largest sector weight. Combined, industrials, consumer staples and energy barely account for more than S&P 500 than tech on its own. Five of the S&P 500’s top 10 holdings are tech stocks.
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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).
While earnings multiples on tech stocks have jumped this year, investors should not expect another tech bubble on par with what was seen in 2000. In fact, the largest tech stocks today are far less pricey than their counterparts were in 2000.
“The relationship between tech stocks and the S&P has not always been this close. Over the last six months, tech has tied with consumer discretionary for the highest correlation with the S&P at 0.82, according to Kensho,” reports CNBC. “Over the last two years, tech falls to third place behind industrials and consumer discretionary, the analysis showed.”
For more information on the tech sector, visit our technology category.
Tom Lydon’s clients own shares of QQQ, Apple and Facebook.