Market Overview

Is Cisco Beat a Good Signal For Tech ETFs? - ETF News And Commentary


Trading in the technology ETFs has been rough over the past couple of months thanks to broad sell-off in Internet and social media stocks. Earnings for the broad technology sector have also been weak despite solid results from Apple (NASDAQ: AAPL) and Facebook (NASDAQ: FB).

Total earnings for 1.2% of the sector's total market capitalization that has reported results so far are up 4.3% on 2.7% higher revenues. This is lower than 5% and 3.9% growth in earnings and revenues, respectively in the fourth quarter of 2014.

However, one of the tech bellwethers – Cisco Systems (NASDAQ: CSCO) – has lately propelled the tech ETFs higher on the back of the solid results for the third quarter of fiscal 2014. The company beat on both the top and bottom lines and also provided an encouraging guidance for the ongoing quarter (read: Technology ETFs: Pain or Gain Ahead?).

Earnings per share came in at 46 cents, which topped the Zacks Consensus Estimate of 43 cents. Revenues dropped 5.5% year over year to $11.55 billion but surpassed our estimate of $11.34. Stronger-than-expected performance was credited to improving markets for the company's products in the United States and Europe as well as solid growth prospects in cloud computing, mobile and data center businesses despite the fact that government surveillance attempts continued to hurt business in emerging markets.

The network equipment maker expects revenues to fall as much as 1–3% year over year in the ongoing quarter, much better than the analyst expectation of a 5–6% decline. It also projects earnings per share in the range of 51–53 cents, which is well above the Zacks Consensus Estimate of 47 cents.  This suggests that the company, which was hit hard in recent months on falling sales in emerging markets, in particular China, Russia and Brazil, is on the verge of turning around.

Market Impact

Driven by Cisco's robust earnings and revenue beat, most of the analysts revised their earnings estimates and target prices upward. This move swept away the negative sentiment on this networking giant and left many feeling bullish on the stock's future. Moreover, the stock has a Zacks Rank of #2 (Buy), suggesting that bullish trend can definitely continue in the near future (see: all the Technology ETFs here).

Cisco shares had a decent run following its Q3 earnings announcement, rising nearly 7% so far. This smooth trading has also been felt in the ETF world, particularly for those funds that have major allocations to Cisco. Given this, we have highlighted three of the biggest holders of CSCO stock in ETF form and how these have held up on its solid earnings report:

iShares North American Tech-Multimedia Networking ETF (IGN)

This ETF provides concentrated exposure to the domestic multimedia networking securities by tracking the S&P North American Technology-Multimedia Networking Index. Holding 25 securities in its basket, Cisco occupies the top position with a 10.08% allocation. The product has a wide exposure to various market cap levels with 37% in large caps, 34% in small caps and the rest in mid caps.

The fund has accumulated $303.6 million while sees a moderate volume of more than 63,000 shares a day. Expense ratio comes in at 0.47%. The fund added 2.6% over the past six days post Cisco earnings. However, the fund has a Zacks ETF Rank of 4 or ‘Sell' rating with High risk outlook (read: Time to Bargain Hunt with This Technology ETF?).

PowerShares Dynamic Networking Portfolio (PXQ)

This fund follows the Dynamic Networking Intellidex Index, holding 30 securities in its basket. Out of these, Cisco takes the top spot at 5.84%. From a sector look, communication equipment dominates the fund portfolio with more than three-fifths of the portfolio, followed by 16% in systems software.  

The fund has a definite tilt toward small caps accounting for 48% while large and mid cap make up for 33% and 18% of the portfolio, respectively. The fund is less popular and illiquid in the broad tech space with AUM of $29.9 million and average daily volume of under 6,000 shares. It charges 64 bps in annual fees and gained 4.4% over the past six trading sessions. PXQ has a Zacks ETF Rank of 3 or ‘Hold' rating with High risk outlook.

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