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Standard & Poor's


09/25/14 05:00:37 PM


Thanks to a strong last three months, the information technology sector has been a great place to invest in 2014, rising 13% through September 19, ahead of the 8.8% return for the S&P 500 Index. But while recent performance helps create interesting talking points, S&P Capital IQ believes ETF investors need to look deeper.

Sam Stovall, managing director-U.S. equity strategy for S&P Capital IQ, notes that the S&P 500 information technology sector has been the strongest sector performer during the fourth quarter, rising 6.6% on average, ahead of the 5.0% gain for the broader market. Further he highlights that with a P/E-to-projected EPS growth rate of 1.3X, the tech sector is the third lowest of the ten GICS sectors and he believes the technical trends for the sector are favorable. S&P Capital IQ has buy or strong buy recommendations on 57 of the 187 U.S. technology stocks under STARS coverage (30% of total coverage).

Sector investing, using ETFs, remains quite popular in 2014. Investors added $21 of fresh money to such ETFs in the first eight months of 2014 according to BlackRock data. Information technology ETFs added $1.3 billion, though this lags other sectors such as energy ($7.5 billion) and health care ($4 billion).

The largest ETF that has significant exposure to technology stocks is Technology Select Sector SPDR (XLK 40 Overweight), with $14 billion in assets under management. While 85% of the assets are in the blue-chip technology stocks in the S&P 500 Index, such as Apple (AAPL 102 ***) Intel (INTC 34 ****) and Qualcomm (QCOM 76 *****), the remainder are in telecom services stocks such as AT&T (T 35 ****).

The ETF earns favorable ranking inputs for the S&P Capital IQ Fair Value of its holdings as well for holding companies with high investment-grade Standard & Poor's Credit Ratings. (S&P Capital IQ operates independently from Standard & Poor's Ratings.) The largest industry exposure is to Technology Hardware, Storage & Peripherals (21% of assets), followed by Software (17%), IT Services (15%) and Diversified Telecom Services (11%). The ETF also has a modest 0.16% expense ratio and trades with a tight bid/ask spread of a penny.

For investors who want pure exposure to technology, Vanguard Information Technology (VGT 100 Overweight) is a strong choice. The $6 billion ETF has no telecom services stocks but does include some mid- and small-caps. The median market capitalization of its holdings was just $1.8 billion, much lower than the $16 billion of XLK, and, not surprisingly, its three-year standard deviation of 13.6 was also higher than XLK's 11.6. Yet because there is still a lot of overlap in its holdings, VGT's ranking is also aided by the Fair Value and Credit Ratings of its holdings.

VGT's expense ratio at 0.14% is lower, but Vanguard's bid/ask spread is wider at $0.05, due in part to much lower volume. Thus far in 2014, XLK has been the better performer, but in 2013, VGT was 35 basis points stronger.

Investors wanting more narrow exposure to one or two sub-industries might find appeal in Market Vectors Semiconductor ETF (SMH 51 Marketweight), which has 85% in semiconductors and the remainder in semiconductor equipment stocks. The ETF has risen more this year than the diversified SPDR and Vanguard ETFs and earns a favorable ranking in part for the above-average S&P Capital IQ STARS. Applied Materials (AMAT 22 *****) and Broadcom (BRCM 40 ****) join INTC in the top-10 holdings. The ETF has a net expense ratio of 0.35% and trades with a bid/ask spread of $0.01.

Sam Stovall and I will be joined by S&P Capital IQ Technology Equity analyst Scott Kessler to discuss the appeal of the sector and certain stocks and ETFs on September 30 at 11am. To register, please go to: or email


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