A Stunning View Of A Popular Tech ETF

Investors know this story. The technology sector is the largest sector allocation in the S&P 500 and, this year, is the best-performing group in the benchmark U.S. equity index. Buoyed by the fortunes of marquee large-cap tech stocks, such as Apple Inc. AAPL, the Technology Select Sector SPDR XLK is up nearly 19 percent year-to-date.

Still, there have been concerns about elevated valuations in the technology sector and that the group has run too far too fast. While some market observers argue a sequel to the 2000 “tech wreck” is unlikely, some analysts aren't enthusiastic about the sector.

In a note out Wednesday, AltaVista Research tagged XLK, the largest consumer staples ETF by assets and the most heavily traded technology ETF, with an Underweight rating.

Not Too Positive

“Typically, funds in this category consist of stocks trading at relatively expensive valuations and/or having below-average fundamentals,” said AltaVista of its Underweight rating on XLK.

The research firm's estimated 2017 price-to-earnings ratio on XLK is 19.1, just ahead of the estimated 18.9 on the S&P 500. Four of the sector SPDR ETFs are expected to trade at higher earnings multiples than XLK, according to AltaVista data. Interestingly, short interest in XLK is relatively low at 10 percent. That's well below the average short interest found on XLK's consumer staples, industrial, materials and utilities equivalents, notes AltaVista.

Apple is now 15.3 percent of XLK's weight, nearly 500 basis points more than the ETF allocates to Microsoft Corporation MSFT, the ETF's second-largest holding.

Getting Frothy

“The massive Tech rally so far this year—beating all other sectors and about 2/3 higher than the S&P 500--has pushed valuations well above their range of the past few years (see P/E history below), which in turn has diminished future appreciation potential to about average in our opinion,” said AltaVista. “That said, the sector's margins and ROE remain exceptionally high with long-term EPS growth expectations modestly better than the S&P 500 overall.”

Year-to-date, investors have added just over $242 million to XLK.

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