Is SPDR S&P Software & Services ETF (XSW) a Strong ETF Right Now?

A smart beta exchange traded fund, the SPDR S&P Software & Services ETF (XSW) debuted on 09/28/2011, and offers broad exposure to the Technology ETFs category of the market.

What Are Smart Beta ETFs?

The ETF industry has long been dominated by products based on market cap weighted indexes, a strategy created to reflect the market or a particular market segment.

Investors who believe in market efficiency should consider market cap indexes, as they replicate market returns in a low-cost, convenient, and transparent way.

If you're the kind of investor who would rather try and beat the market through good stock selection, then smart beta funds are your best choice; this fund class is known for tracking non-cap weighted strategies.

This kind of index follows this same mindset, as it attempts to pick stocks that have better chances of risk-return performance; non-cap weighted strategies base selection on certain fundamental characteristics, or a mix of such characteristics.

The smart beta space gives investors many different choices, from equal-weighting, one of the simplest strategies, to more complicated ones like fundamental and volatility/momentum based weighting. However, not all of these methodologies have been able to deliver remarkable returns.

Fund Sponsor & Index

Because the fund has amassed over $278.99 million, this makes it one of the average sized ETFs in the Technology ETFs. XSW is managed by State Street Global Advisors. This particular fund seeks to match the performance of the S&P Software & Services Select Industry Index before fees and expenses.

The S&P Software & Services Select Industry Index represents the software sub-industry portion of the S&P Total Stock Market Index. The S&P TMI tracks all the U.S. common stocks listed on the NYSE, AMEX, NASDAQ National Market and NASDAQ Global Select Market. The Software Index is a modified equal weight index.

Cost & Other Expenses

Since cheaper funds tend to produce better results than more expensive funds, assuming all other factors remain equal, it is important for investors to pay attention to an ETF's expense ratio.

Annual operating expenses for this ETF are 0.35%, making it one of the least expensive products in the space.

XSW's 12-month trailing dividend yield is 0.17%.

Sector Exposure and Top Holdings

Even though ETFs offer diversified exposure that minimizes single stock risk, investors should also look at the actual holdings inside the fund. Luckily, most ETFs are very transparent products that disclose their holdings on a daily basis.

For XSW, it has heaviest allocation in the Information Technology sector --about 95.90% of the portfolio.

Looking at individual holdings, Zynga Inc. Class A (ZNGA) accounts for about 0.86% of total assets, followed by Moneygram International Inc. (MGI) and Activision Blizzard Inc. (ATVI).

Its top 10 holdings account for approximately 7.49% of XSW's total assets under management.

Performance and Risk

The ETF has lost about -20.83% and is down about -22.12% so far this year and in the past one year (as of 04/27/2022), respectively. XSW has traded between $129.30 and $186.85 during this last 52-week period.

The ETF has a beta of 1.16 and standard deviation of 29.17% for the trailing three-year period, making it a high risk choice in the space. With about 201 holdings, it effectively diversifies company-specific risk.

Alternatives

SPDR S&P Software & Services ETF is an excellent option for investors seeking to outperform the Technology ETFs segment of the market. There are other ETFs in the space which investors could consider as well.

Invesco Dynamic Software ETF (PSJ) tracks Dynamic Software Intellidex Index and the iShares Expanded TechSoftware Sector ETF (IGV) tracks S&P North American Technology-Software Index. Invesco Dynamic Software ETF has $244.41 million in assets, iShares Expanded TechSoftware Sector ETF has $4.41 billion. PSJ has an expense ratio of 0.56% and IGV charges 0.43%.

Investors looking for cheaper and lower-risk options should consider traditional market cap weighted ETFs that aim to match the returns of the Technology ETFs.

Bottom Line

To learn more about this product and other ETFs, screen for products that match your investment objectives and read articles on latest developments in the ETF investing universe, please visit Zacks ETF Center.

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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 Nasdaq, Inc.