A Foreign Revenue Opportunity Amid Tariff Controversy

During May’s tariff-induced market swoon, technology stocks were battered in part because the sector derives a significant portion of its revenue from ex-US markets. Give some credit to the SPDR S&P Software & Services ETF (NYSEArca: XSW).

That high-flying exchange traded fund experienced a relatively modest May decline and is now higher by 31% year-to-date.

XSW “seeks to provide exposure to the software and services segment of the S&P TMI, which comprises the following sub-industries: Application Software, Data Processing & Outsourced Services, Home Entertainment Software, IT Consulting & Other Services, and Systems Software,” according to State Street.

High foreign revenue streams do not mean an investment should be ignored even in today’s tough tariff talk climate.

“Does a high foreign revenue sector mean that all of the stocks, or industries, in that sector have foreign revenues too high to yield opportunities in the midst of never-ending tariff talk?” State Street asked in a recent note. “Is taking a pure sector view too blunt, obfuscating growth and performance opportunities at the industry level?”

Examining XSW ETF

Investors are beginning to look at tech stocks as a safety play, betting that the double-digit gains will continue on rising earnings growth, despite concerns over global trade conditions. Strong demand for various corporate software platforms is fueling XSW’s ascent this year.

Software is an example of an industry group with strong foreign revenues with a robust domestic focus, important traits in the current environment.

“We found that sub-industries with high foreign revenues (e.g., semiconductors) have vastly negative performance and earnings trends,” according to State Street. “Meanwhile, more domestic areas, like the services and software industries, have had much better performance and earnings sentiment.”

Increased corporate dependency on Internet solutions and cloud-based services are also catalysts that bolster the long-term thesis for XSW.

“Just because tech stocks have high foreign revenues, it doesn’t mean the entire sector should be sidestepped,” according to State Street. “XSW may warrant consideration. Not surprisingly, just as we enter this earnings season, 52% of the stocks are trading above their 50-day moving average versus just 37% for the broader tech sector, a sign of positive relative momentum in a sector that ranks first in cross-sectional momentum (based on 12-1, 6-1, and 3-1 momentum scores.”

For more information on the tech sector, visit our technology category.