If The Dip Isn't Bought, Apple Party Could Be Over for Some ETFs
In what can only be deemed a surprising confirmation that the global economy is slowing, technology juggernaut Apple (NASDAQ: AAPL) engaged in a terrible double-dip on Tuesday. Not only did the company report fiscal third-quarter results that missed estimates, but its fourth-quarter guidance disappointed as well.
Apple reported a fiscal third-quarter profit of $9.32 per share on revenue of $35 billion, but analysts expected EPS of $10.36 on revenue of $37.2 billion. For the fourth quarter, the company forecast a profit of $7.65 a share on revenue of $34 billion, well below the profit of $10.27 a share on sales of $38 billion analysts are expecting.
Earnings misses from Apple, while not unheard of, are rare and investors had been leaning on this report from the largest U.S. company by market capitalization to lift the fortunes of a sagging equity market. As shares of Apple plunge in Tuesday's after-hours session, it appears two outcomes are possible.
First, investors could use this dip to buy Apple, convincing themselves that this is still the story stock of which they have become so fond. Or the dip will not be bought, indicating the market is far weaker than anyone wants to believe and that Apple's stock will enter a prolonged slump.
Should the latter scenario come to pass, several ETFs will be dragged lower.
That is not a bold statement because it has has happened before. Most passive equity-based ETFs use a market cap methodology to weight the funds' holdings. Since Apple had a market value of almost $562 billion as of the close of markets Tuesday, by far the largest market value for any U.S. company, the stock is the largest holding in a plethora of ETFs.
Apple's large weights in ETFs such as the Technology Select Sector SPDR (NYSE: XLK) and the iShares Dow Jones US Technology Index Fund (NYSE: IYW) is one of those things that works until it does not. Unfortunately, "does not" may have just arrived again. And with Apple often looked at as the savior for the market at large, the broader market's Apple vulnerability carries over to ETFs since it is demand for or selling pressure on an ETF's underlying components that drives the fund's price action.
XLK and IYW, with weights of 20 percent and 24 percent, respectively, to Apple will not be the only ETFs to feel the sting of excessive weights to the stock. The Focus Morningstar Technology Index ETF (NYSE: FTQ) devotes more than 21 percent of Apple while the Vanguard Information Technology Index Fund (NYSE: VGT) also allocates 20 percent to the iPad maker. The PowerShares QQQ (NASDAQ: QQQ), also known as the Nasdaq 100 tracking ETF, cannot be overlooked either with a concentration of more than 19 percent to Apple.
There is a bright side and it exists for those who are willing to use inverse ETFs as short-term trades. For example, the Direxion Daily Technology Bear 3X Shares (NYSE: TECS) recently switched indexes. TECS now tracks the same index as XLK, meaning an Apple slide is very good news for the former.
Add the ProShares UltraPro Short QQQ (NASDAQ: SQQQ) to the list. That is the triple-leveraged inverse equivalent of QQQ.
There are some global plays to consider as well, primarily the ProShares UltraShort FTSE China 25 (NYSE: FXP). iPhone and iPad sales barely beat the low end of estimates in the third quarter, while Mac sales were light at 4 million units compared to the estimate of 4.3 million. Combine those numbers with Apple's slack fourth-quarter guidance and it can be argued these statistics are proof positive that marquee emerging markets are slowing at a more precipitous clip than U.S. investors want to believe.
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