Technology-sector ETFs have been on a tear this year, outpacing
the S&P 500 index with double-digit gains, but that upward
trend seems to be running low on steam, and many investors are
reallocating assets into other sectors such as financials.
The change in momentum seems to be largely tied to Apple, though
disappointing earnings from Google and IBM only serve to underscore
how the Apple-heavy tech sector is suffering from weakening global
Google's disappointing earnings, which were released
accidentally during Thursday's trading session instead of after it,
sent the company's shares down 9 percent. Google is the
second-biggest technology company by market value. So Google now
joins Apple, the biggest tech company, in dragging down tech
Apple's stock price of the technology giant was trading as high
as $705 a share about a month ago, but has since given up nearly 8
percent in value as the market came to terms with what it perceived
as disappointing sales figures. Apple closed at $644.61 a share
Apple is the largest holding in many market-cap-weighted
technology ETFs such as the $33.6 billion PowerShares QQQ Trust
(NasdaqGM:QQQ) and the $9.8 billion Technology Select SPDR ETF
Those funds have slipped nearly 3 and 4 percent, respectively,
in the past month alone. By comparison, the SPDR S&P 500 ETF
(NYSEArca:SPY) is only down 0.4 percent in the same period. Apple
represents roughly 20 percent of both QQQ and XLK's portfolio, an
allocation that allows the tech giant to have an undue impact on
What's more, the drop in value in these funds has come hand in
hand with sizable asset outflows. Indeed, both QQQ and XLK ranked
among the week's biggest redemptions in the five-day period ended
Thursday, Oct 11. Investors yanked more than $1.1 billion out of
QQQ and nearly $595 million from XLK, according to data compiled by
"People make stock-specific decisions because of Apple's weight
in these portfolios," Paul Weisbruch of Street One Financial told
Apple's stellar rally that had earned the company's stock price
gains of more than 60 percent in 2012 left a lot of investors with
embedded gains in the stock, Weisbruch said, something that caused
many to want to get out of the position now that the stock has
"Some people are sitting on fairly nice gains if they've held
the stock since the spring when it was in the $500s," Weisbruch
He added that a lot of the redemptions taking place are also
tax-related as the calendar year nears its end, a trend that should
pick up pace in the next several weeks, especially for funds that
have hefty allocations to a single stock as hot as Apple, he
"But investors aren't racing out of the market and into cash,"
he added. On the contrary, they are reallocating their money.
Financial ETFs, Smart Beta Funds Gain On Apple
Financial sector funds have been particularly popular these days
as they rally to test multimonth highs, Weisbruch noted.
ETFs like the Financial Select SPDR ETF (NYSEArca:XLF) and the
iShares Dow Jones US Financial Index Fund (NYSEArca:IYF) are indeed
garnering investor attention. In the past five days alone, XLF and
IYF have each gained roughly 2 percent.
The $8.36 billion XLF ranked as the sixth-most-popular fund in
the week ended Thursday, Oct. 11, with net inflows of nearly $152
million. All in all, XLF has hauled in a net of $823 million in the
past month. IYF has picked up a net of $15 million in the same
period, according to data compiled by IndexUniverse.
Another group of ETFs that could be poised to attract some of
these reallocated dollars are tech funds that weight securities
based on fundamentals or other quantitative measures, also known as
smart beta funds, Weisbruch said.
Those who don't want to bail out on owning Apple, but who also
don't want a single company to overrun the portfolio's performance,
might find that equally weighted or other alternative-weighting
strategies work well for them.
Funds like First Trust's Technology AlphaDex Fund (NYSEArca:FXL)
as well as PowerShares' Dynamic Tech Sector ETF (NYSEArca:PTF)
could emerge indeed as solid alternatives to those who want to own
stocks like Apple, he noted.
Apple currently represents roughly 1.9 percent of FXL's
portfolio, while PTF allocates 2.5 percent to the tech giant.
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