How Will These ETFs Perform Post IBM Earnings? - ETF News And Commentary


International Business Machines ( IBM ), the world's largest computer-services provider, led to mixed reactions on the Wall Street following its second-quarter earnings release after the market close. While the company beat earnings estimates and broke a long streak of revenue estimate miss, revenues declined for the ninth consecutive quarter on a year-over-year basis.

IBM Q2 Results in Detail

Revenues dropped 2% year over year to $24.4 billion but outpaced the Zacks Consensus Estimate of $24.16 billion. Earnings per share of $4.32 exceeded our estimate by a penny.

Sluggish demand for computer hardware and weak sales in emerging markets, including China, Brazil, Russia and India, continued to weigh on the top line. Further, weaker-than-expected software sales also hurt the company's total revenue.

However, investors should note that sales in emerging markets improved from the 11% drop in the first quarter to a 7% decline in the second quarter, suggesting that the company is on the right track for a strong second half of the year (read: 3 Top Performing Emerging Market ETFs ).

The company is transforming its traditional business to strategic growth areas including cloud computing, big data and mobile security. Cloud computing business has grown more than 50% in the first half of the year to $2.8 billion from the same period last year. This trend is likely to continue in the upcoming quarters as International Business Machines is seeking to store data and software applications remotely in the cloud rather than on the site.

Based on the expansion of the cloud computing business, IBM reiterated its earnings per share outlook of at least $18.00 for this fiscal year and $20 for the next. Both are slightly above the Zacks Consensus Estimate of $17.93 and $19.89 for 2014 and 2015, respectively.

Though the earnings and revenue beat as well as better-than-expected earnings guidance sound encouraging, the continued fall in revenues on an annual basis is a matter of concern. But this is unlikely to continue for long given the company's industrywide shift to the lucrative cloud computing business and its favorable Zacks Rank #3 (Hold).

As such, IBM shares were on a roller coaster ride in after-market hours on Thursday trading. The stock initially climbed as much as 2.8% in the after-market trading following the results and then slid to 2% at the close (see: all the Technology ETFs here ).   

ETFs to Watch

This mixed reaction for IBM results has put some ETFs with the highest allocation to this tech giant in focus for the days ahead. Investors should closely monitor the movement in these funds and could catch the opportunity from any surge in the IBM price, or avoid these if the stock drags them down in the coming months:

First Trust NASDAQ Technology Dividend Index Fund ( TDIV )

This fund provides exposure to the dividend payers within the technology sector by tracking the Nasdaq Technology Dividend Index. The product has amassed about $587 million in its asset base while trades in volume of more than 150,000 shares per day. The ETF charges 50 bps in annual fees (read: 3 Dividend ETFs Crushing the Market ).

In total, the fund holds about 89 securities in its basket. Of these firms, IBM takes the fifth spot, making up roughly 7.92% of the assets. In terms of industrial exposure, the fund allocates one-fourth portion in semiconductor and semiconductor equipment, followed by software (15.68%), and technology hardware, storage & peripherals (15.44%). The fund has returned over 11% so far this year.

iShares Dow Jones US Technology ETF ( IYW )

This ETF tracks the Dow Jones US Technology Index, giving investors exposure to the broad technology space. The fund holds 142 stocks in its basket with AUM of $3.9 billion while charging 46 bps in fees and expense. Volume is good as it exchanges nearly 449,000 shares in hand a day. Of the major holdings, IBM takes the third position in the portfolio, making up 5.67% of total 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 nearly 11% in the year-to-date time frame and has a Zacks ETF Rank of 2 or 'Buy' with a Medium risk outlook (read: 3 Promising Sectors ETFs Ahead of Q2 Earnings Season ).

Select Sector SPDR Technology ETF ( XLK )

The most popular technology ETF in the market, XLK follows the Technology Select Sector Index. This fund manages about $13 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 7.4 million.

Here, IBM is the fifth firm with 4.79% allocation. In terms of industrial exposure, the product is widely spread across technology hardware storage & peripherals, software, IT services, Internet software & services and diversified telecom services that make up for double-digit allocation. The fund has added about 10% so far this year and has a Zacks ETF Rank of 1 or 'Strong Buy' with a Medium risk outlook.

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FT-NDQ TECH DIF (TDIV): ETF Research Reports

ISHARS-US TECH (IYW): ETF Research Reports

SPDR-TECH SELS (XLK): ETF Research Reports

INTL BUS MACH (IBM): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Earnings , ETFs

Referenced Stocks: TDIV , IYW , XLK , IBM

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