Technology ETFs: New Value Destinations

Investors don't often associate the technology sector with value havens, but data suggest the Technology SPDR (ETF) (NYSE:XLK), the largest technology sector exchange-traded fund, has the makings of a credible value play.

The $13.1 billion XLK has, somewhat quietly, gained 7.9 percent year-to-date, good for the second-best performance among the nine sector SPDR ETFs. However, that is still 600 basis points behind the surging Consumer Discretionary SPDR (ETF) (NYSE:XLY).

Still, XLK's 2015 performance is impressive considering the ETF allocates a combined 6.1 percent of its weight to Intel Corporation (NASDAQ:INTC) and International Business Machines Corp. (NYSE:IBM), two of the 14 members of the Dow Jones Industrial Average that have traded lower this year.

AltaVista Research has a neutral rating on XLK, but that is not as tepid as it sounds.

A rating of neutral (emphasis deleted) is assigned to funds with ALTAR Scores between 6.0 percent and 8.0 percent. This indicates that valuations adequately reflect the fundamentals of stocks in these funds. The majority of funds we cover fall into this category, said AltaVista in a new research note.

XLK's Advantages

XLK's recent performance has been impressive. The tech ETF is up nearly 8.4 percent over the past month, topping the S&P 500 by more than 200 basis points over that period. However, XLK is still attractively valued relative to the broader market. AltaVista estimates XLK's 2015 price-to-earnings ratio to be 17.1 compared to 17.8 for the S&P 500. Only three of the nine legacy sector SPDR ETFs have lower estimated P/E ratios than XLK, and the tech ETF trades at a considerable discount to XLY.

Tech seems to have become a new Value sector. Growth has slowed, but long-term growth forecasts still far exceed those for the S&P 500 while margins & ROE remain impressively high. Meanwhile the sector trades at a P/E discount to the S&P500 whereas historically it has enjoyed a premium. As a result we think Tech appears relatively attractive at these levels, said AltaVista.

Investors should remember that as shares of Apple Inc. (NASDAQ:AAPL) move, XLK is likely to emulate the pattern. The iPhone maker accounts for nearly 16 percent of the ETF's weight.

Google parent Alphabet Inc (NASDAQ:GOOG) (NASDAQ:GOOGL) combines for nearly 10 percent of XLK's weight.

Interestingly, XLK has added about $900 million in new assets since Apple delivered fiscal fourth-quarter earnings in late October. XLK's percentage of shares outstanding sold short is just 7 percent, according to AltaVista data good for one of the lowest totals among the nine sector SPDRs.

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