Impact On Apple ETFs Following Analyst Downgrade

Shares of Apple Inc. AAPL jumped 4.7 percent to record heights Wednesday after the iPhone maker reported fiscal third-quarter earnings of $1.67 per share on sales of $45.4 billion. Wall Street was expecting Apple to deliver earnings per share of $1.57 on revenue of $44.89 billion. Sell-side analysts were mostly enthusiastic about Apple's latest quarter.

“We believe the iPhone installed base will exceed 635M exiting C2017, and this impressive installed base should drive strong iPhone replacement sales and earnings, as well as cash flow generation to fund strong long-term capital returns,” said Canaccord Genuity analyst Michael Walkley as Benzinga reported Wednesday.

Still, some research firm took the surge in Apple shares as an opportunity to downgrade the stock. CFRA Research pared its rating on the iPad maker to Buy from Strong Buy.

“While the company reported better than expected June-Q results and CFRA sees upside to consensus estimates and multiple expansion, there is more muted upside to our analyst’s 12-month target price of $175,” said CFRA Director of ETF & Mutual Fund Research Todd Rosenbluth in a note out Wednesday.

ETF Impact

With Apple's market capitalization flirting with a whopping $820 billion, the impact the stock has an array of exchange-traded funds grows. As Rosenbluth notes, nearly 130 ETFs feature Apple among their top 10 holdings.

That list runs the gamut of broad market funds such as S&P 500-tracking funds to the PowerShares QQQ QQQ to technology sector ETFs, including the Technology Select Sector SPDR XLK.

Smart Beta, Too

Most ETFs, including QQQ and XLK, weight their holdings by market value, meaning that as Apple grows, its weight in these funds grows as well. As of Aug. 1, XLK's Apple weight was nearly 14.7 percent, or more than 400 basis points than the ETF devotes to its second-largest holding, Microsoft Corporation MSFT.

“There are 129 ETFs with a recent top 10 holding in Apple according to CFRA research. In ranking ETFs, CFRA combines holdings-level analysis with ETF attributes such as expense ratio, bid/ask spread and technical analysis,” said Rosenbluth.

Just because investors skirt cap-weighted ETFs does not mean they are avoiding Apple. Due to the company's strong fundamentals, including a growing dividend, a massive cash pile and rising earnings, the stocks is also a staple in many smart beta ETFs, including the iShares Edge MSCI USA Value Factor ETF VLUE and the iShares Edge MSCI USA Quality Factor ETF QUAL.

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