Surprising Sector-Level Value For This ETF

With the current bull market fast approaching its eighth anniversary, many market participants believe it is increasingly harder to find value in equities.

Sure, energy and financial services are frequently mentioned as credible value destinations, but not many other sectors are considered inexpensive. Even fewer trade at noticeable discounts to long-term averages. So, it might come as a surprise to some that technology, the largest sector weight in the S&P 500, is considered a value play.

Finding Value In Unlikely Spaces

That, even while the Technology SPDR (ETF) XLK, the largest technology exchange traded fund by assets, is up more than 9 percent year-to-date and nearly 27 percent over the past year.

In a recent note, AltaVista tagged XLK with a Neutral rating. That may sound tepid, but the research firm has Underweight ratings on a slew of the other sector SPDR ETFs, making XLK's Neutral rating look good by comparison.

The research firm said in terms of best bets for value among sector ETFs, there is XLK and the ETF's financial services and healthcare counterparts.

Based on AltaVista's 2017 estimates, XLK should carry a price-to-earnings ratio of 17.9, just under the P/E of 18 the research firm has on the S&P 500. While that does not necessarily qualify as a “deep discount,” only XLK's financial services and healthcare counterparts are less expensive. Additionally, XLK's is noticeably cheaper than its defensive consumer staples and utilities equivalents.

XLK's Profile, In Review

XLK holds 74 stocks. Over 37 percent of the ETF's combined weight goes to Internet software and services companies and traditional software makers. Apple Inc. AAPL is the ETF's largest holding at 15.1 percent, an allocation that is about 500 basis points larger than XLK assigns to Microsoft Corporation MSFT, the fund's second-largest holding.

“Although profitability in terms of margins and ROE remains exceptionally high, earnings growth has declined in recent years, and long-term EPS growth expectations are just modestly better than the S&P 500 overall,” said AltaVista.” However, surging share prices in the past few months has caused the sector to break out above it's P/E trading range of recent years in turn diminishing future appreciation potential to about average in our opinion.”

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