The technology sector has been worst hit of late on lofty
valuations and forewarnings of soft earnings. This trend is likely
to continue at least in the near term with disappointing Q1 results
from International Business Machines (
), the largest computer-services provider.
This has also heightened worries over the other traditional
computing giants like Oracle (
), Cisco (
), EMC Corp. (
) and Hewlett-Packard (
), which are expected to report this month or in the next. This is
because enterprise spending has been on the decline, and
corporations and governments are embracing software-as-a-service
(SaaS) and other cloud offerings instead of in-house technology
IBM Results in Focus
The missing trend for revenues continued for this tech giant for
eight consecutive quarters. Revenues dropped 4% year over year to
$22.48 billion, and fell shy of the Zacks Consensus Estimate of
$23.01 billion and represents the lowest quarterly revenue in five
years. Earnings per share of $2.54 met our estimate but fell year
over year for the first time in 11 years.
Sluggish demand for computer hardware and weak sales in emerging
markets, including China, Brazil, Russia and India, were the major
culprits of the dull performance (read:
Emerging Market ETFs See Inflows: 3 ETFs to
The company is transforming its traditional business to strategic
growth areas including cloud computing, Big Data analytics, social,
mobile and security. However, it will take years for the company to
reap full benefits and boost growth.
Despite the lackluster Q1, IBM reiterated its earnings per share
outlook of at least $18.00 for the full fiscal year. Though this is
slightly higher than the Zacks Consensus Estimate of $17.92, the
disappointing top line continued to dampened investor mood. As a
result, IBM shares fell about 4% in after hour trading yesterday.
This has raised questions on the company's revenue growth story,
leaving investors feeling bearish about this stock for at least in
the near term. Further, IBM currently has a Zacks Rank #4 (Sell)
and a poor industry Rank (in the bottom 36%) at the time of writing
as per the
Zacks Industry Rank
, suggesting that more pain could be in store for this company in
the near term.
ETFs to Watch
The uninspiring results could have a huge impact on tech ETFs that
are heavily invested in this large company. Below, we have
highlighted three ETFs with the highest allocation to IBM that
could be in focus in the days ahead (see:
all the Technology ETFs here
Investors should closely monitor the movement in these funds and
could catch the opportunity from any surge in the IBM price, or
avoid them if the stock drags them down in the coming months:
First Trust NASDAQ Technology Dividend Index Fund (
This fund provides exposure to the dividend payers within the
technology sector by tracking the Nasdaq Technology Dividend Index.
The product has amassed about $465.9 million in its asset base
while trades in volume of more than 133,000 shares per day. The ETF
charges 50 bps in annual fees (read:
3 Excellent Dividend ETFs for Growth and Income
In total, the fund holds about 89 securities in its basket. Of
these firms, IBM takes the second spot, making up roughly 8.33% of
the assets. In terms of industrial exposure, the fund allocates
one-fourth portion in semiconductor and semiconductor equipment,
followed by software (15.65%), and technology hardware, storage
& peripherals (14.92%). The fund has returned nearly 2.4% so
far this year.
iShares Dow Jones US Technology ETF (
This ETF tracks the Dow Jones US Technology Index, giving investors
exposure to the broad technology space. The fund holds 143 stocks
in its basket with AUM of $3.8 billion while charging 46 bps in
fees and expense. Volume is moderate as it exchanges nearly 380,000
shares in hand a day. Of the major holdings, IBM takes the third
position in the portfolio, making up 6.59% of asset.
More than half of the portfolio is skewed toward the technology
hardware and equipment segments while software & computer
services take the remaining portion in the basket. The fund is up
1.7% in the year-to-date time frame and has a Zacks ETF Rank of 3
or 'Hold' with a 'Medium' risk outlook.
Select Sector SPDR Technology ETF (
The most popular technology ETF on the market, XLK follows the
Technology Select Sector Index. This fund manages about $12.2
billion in asset base and provides exposure to a small basket of 73
securities. The ETF charges 16 bps in fees per year from investors
while trades in heavy volume of more than 7.7 million (read:
Technology ETFs: Pain or Gain Ahead?
Here, IBM is the fourth firm in the fund's holdings with 5.55%
allocation. In terms of industrial exposure, the product is widely
spread across technology hardware storage & peripherals, IT
services, software, Internet software & services and
diversified telecom services that make up for double-digit
allocation. The fund has added nearly 1.38% so far this year and
has a Zacks ETF Rank of 3 or 'Hold' with a 'Medium' risk outlook.
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