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Standard & Poor's


07/23/15 05:00:14 PM


With a recent market cap of $770 billion it should be no surprise that Apple (AAPL 124 ***) is widely held in many ETFs. However in light of the early market 6% sell off in the shares after reporting results yesterday afternoon investors may want to consider ways to have more diversification.

AAPL posts June-Q operating EPS $1.85 that was ahead of our estimate by a penny though sales growth of 33% was below our forecast. While he maintained his 12-month target price of $150, S&P Capital IQ Equity Analyst Angelo Zino views negatively the iPhone and iPad shipments and thinks growth is likely to decelerate. For example the September quarter's revenue guidance was below Capital IQ consensus. However, the S&P Capital IQ Hold recommendation, reiterated this morning, is supported by the company's ample net cash balance ($26/share) and Zino's view of long-term prospects in China.

S&P Capital IQ conducts holdings analysis to support our ranking of more than 800 equity ETFs. So Zino's qualitative view on Apple plays a meaningful role in our research of many ETFs. In addition, Apple has an S&P Capital IQ Quality Ranking of B+ and a Standard & Poor's Credit Rating of AA+ that impacts an ETF's risk considerations.

Apple is a top-10 holding in 98 equity ETFs according to S&P Capital IQ. Besides being the largest stock ETFs tied to the S&P 500 index like Vanguard 500 Index (VOO 194 Overweight) and the Russell 1000 like iShares Russell 1000 (IWB 118 Overweight), the technology giant is more heavily weighted in popular tech-laden products.

For example, it was 18% of assets in Technology Select SPDR (XLK 43 Overweight) and 14% in PowerShares QQQ Trust (QQQ 114 Overweight). These market-cap weighted ETFs have some tech sector diversification to Microsoft (MSFT 47 ***) and Facebook (FB 98 ****) among others; MSFT also opened lower following earnings. But both are heavily reliant on Apple and are likely to be dragged down amid the selloff.

For investors that want a more diversified technology ETF, an equal-weighted approach is worthy of attention. Guggenheim S&P 500 Equal Weight Technology (RYT 91 Marketweight) is one of them. It holds all the technology stocks in the S&P 500 in largely equal proportion regardless of market cap and rebalances quarterly. This means that Electronic Arts (EA 74 ***) was recently a larger position at 1.8% than Apple (1.6%) despite having a market cap of just $23 billion or less than 5% of AAPL. We think RYT is a worthy alternative to XLK, though it has a higher expense ratio and has greater volatility.

Meanwhile, an alternative to QQQ is First Trust NASDAQ 100 Technology Sector (QTEC 42 Marketweight) which is also equally weighted. Apple was the second largest holding earlier this week at 2.9% but was the same size as Cerner (CERN 72 ****) a $25 billion company. Its focus is just on the largest tech companies that trade on the NASDAQ and has no biotech companies.

Of course equal weighting approaches work both ways and investors can miss out on gains achieved by some of the largest companies. For example, XLK has a sizable 9 % stake in the Google share classes (GOOG 662 NR) and (GOOGL 695 ***) while QQQ has an 8% weighting.

Google jumped sharply last week after reporting stronger the expected results and subsequently S&P Capital IQ downgraded its recommendation on GOOGL to hold, from strong buy; GOOGL is up today unlike its mega-cap brethren. QTEC has a combined 3.5% stake in Google while RYT has 2%.

We think while pressure on AAPL will negatively impact market-cap weighted ETFs more than equal-weighted ones, investors need to consider the exposure all ETFs have to various technology companies. S&P Capital IQ reports on these stocks and ETFs can be found on this platform.


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