The technology sector has shown strength buoyed by robust Q2 earnings, especially from Intel ( INTC ), Micron Technology ( MU ) and Apple ( AAPL ). Total earnings for 89.9% of the sector's total market capitalization that has reported so far are up 13% on 6.6% higher revenues. This is much higher than 5.4% and 4.2% growth in earnings and revenues, respectively, in the first quarter of 2014.
Solid earnings growth, which is the best in many quarters, pushed most of the tech stocks to multi-year highs last month. Additionally, improving economic growth is pushing up corporate IT spending, driving the broad sector higher (read: 4 Ways to Play Earnings Growth with ETFs ).
Further, one of the tech bellwethers - Cisco Systems ( CSCO ) - reported better-than-expected results for the fourth quarter of fiscal 2014 after the closing bell on Wednesday, spreading some bullishness into the sector. However, the stock's trading was rough in aftermarket hours.
This is because the stock initially rose over 1% on earnings and revenue beat, but was later in the red on muted guidance and layoff announcement. Shares of CSCO were down 1.1% at the close in aftermarket hours trading.
Cisco Q4 Earnings in Focus
Earnings per share came in at 50 cents, which topped the Zacks Consensus Estimate of 48 cents. Revenues were relatively flat year over year at $12.36 billion and surpassed our estimate of $12.07 billion.
The network equipment maker expects revenues to be flat or up 1% year over year in the ongoing quarter, slightly better than the analyst expectation of flat revenue. Falling demand from phone and cable companies and weakness in emerging markets will likely continue to hurt the company's top line. Cisco also projects earnings per share in the range of 51-53 cents, which is well above the Zacks Consensus Estimate of 47 cents. This reflects not-so bad outlook for the company future growth.
The company plans to cut 6,000 jobs (8% of its total workforce) starting the first quarter of fiscal 2015. The move represents the second major restructuring in a year after the layoff of 4,000 employees last August.
ETFs in Focus
Given Cisco's volatile trading, the following three tech ETFs having the largest allocation to Cisco are in focus in the coming days. Investors should carefully monitor the movement of these funds and grab the opportunity when it arises or avoid if the stock drags them down (see: all the Technology ETFs here ):
iShares North American Tech-Multimedia Networking ETF ( IGN )
This ETF provides concentrated exposure to the domestic multimedia networking securities by tracking the S&P North American Technology-Multimedia Networking Index. Holding 25 securities in its basket, Cisco occupies the top position with a 9% allocation. The product has a wide exposure to various market cap levels with 45% in small caps, 29% in mid caps and the rest in large caps.
The fund has accumulated $319.8 million while sees light volume of more than 54,000 shares a day. Expense ratio comes in at 0.47%. The fund has added 2.1% in the year-to-date time frame and has a Zacks ETF Rank of 2 or 'Buy' rating with Medium risk outlook (read: 4 Great Reasons to Buy These Top Ranked Tech ETFs ).
PowerShares Dynamic Networking Portfolio ( PXQ )
This fund follows the Dynamic Networking Intellidex Index, holding 30 securities in its basket. Out of these, Cisco takes the fifth spot at 5.04%. From a sector look, communication equipment dominates the fund portfolio with more than half of the portfolio, followed by 31% in software and programming.
The fund has a definite tilt toward small caps accounting for 57% share while mid and large cap make up for 24% and 20% of the portfolio, respectively. The fund is less popular and illiquid in the broad tech space with AUM of $27.4 million and average daily volume of under 6,000 shares. It charges 64 bps in annual fees and gained 4.4% over the past three months. PXQ has a Zacks ETF Rank of 3 or 'Hold' rating with High risk outlook.
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 $607 million in its asset base while trades in good volume of more than 154,000 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, CSCO occupies the fourth position, making up roughly 7.92% of the assets. In terms of industrial exposure, the fund allocates nearly one-fourth portion in semiconductor and semiconductor equipment, followed by technology hardware, storage & peripherals (16.05%), software (15.96%) and communications equipment (13.10%). The fund has returned about 6.6% in the past three months.