Last year, just 16 of the 30 members of the Dow Jones Industrial Average posted positive annual gains. Of those 16, a mere nine posted double-digit gains and of those nine, just five closed the year higher by 20 percent or more.
Just one member of that quintet hailed from the technology space, the largest sector weight in the S&P 500. That honor goes to Microsoft Corporation (NASDAQ:MSFT).
"Mr. Softy" was anything but last year, surging to a gain of 22.7 percent, while rival Apple Inc. (NASDAQ:AAPL) slumped with a 3 percent loss.
Apple's market value is nearly $145 billion larger than Microsoft's market value, so the former usually occupies the largest weight in traditional technology sector exchange-traded funds that weigh their holdings by market capitalization.
However, some ETFs with sizable Microsoft allocations were able to fend off Apple's slump last year and post solid gains.
Tech ETFs, Microsoft And Apple
The iShares Dow Jones US Technology ETF (NYSE:IYW) is a prime example of that theme. IYW climbed 3.7 last year, or better than triple the returns delivered by the S&P 500. Of the more than 90 ETFs that hold shares of Microsoft, IYW has the largest allocation to the Washington-based company with a weight of 12.6 percent.
However, IYW is primarily known for its nearly 17 percent weight to Apple, one of the largest weights to the iPhone maker among all ETFs.
Apple's cash reserves were reported to be $203 billion as of late July. At the end of the second quarter, Microsoft had $96.35 billion in cash.
In 2015, MSFT stock has been partying like its 1999, rallying more than 22 percent year to date and continuing to top multi-year highs with a $56 handle currently after trading below $40 briefly during the global equity sell-off in late August of this year. MSFTs relative strength when blended with AAPLs relative weakness has propped MSFTs index exposure higher in market capitalization weighted indices, said Street One Financial Vice President Paul Weisbruch in a note out late last year.
The Tech Advantage
In addition to Microsoft, IYW has another advantage as 2016 starts. Technology, the largest sector weight in the S&P 500, has historically been one of the best-performing sectors during Fed tightening cycles.
Technology is a cyclical sector, so its durability against a backdrop of rising rates is not surprising; higher rates should signal the Fed's confidence in the sturdiness of the U.S. economy.
In addition, technology companies may be poised to outperform other sectors amid higher rates, in large part due to their large cash reserves and strong balance sheets. With limited debt financing, they may be less vulnerable than debt-laden firms due to the higher borrowing costs that result when rates rise.
As such, this sector has the potential for sustainable growth and continued shareholder friendly policies even as rates increase, said BlackRock Global Investment Strategist Heidi Richardson in a recent note.
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