When it comes to sector exchange traded funds that are credible plays on rising interest rates, financial services funds, the ones that are not heavy on rate-sensitive real estate stocks, command the bulk of the media's and investors' attention.
However, another cyclical sector can also provide investors with protection and profit potential if and when the Federal Reserve gets around to increasing borrowing costs: Technology. In fact, technology, the largest sector weight in the S&P 500, has historically been of the best-performing sectors during Fed tightening cycles.
The $2.51 billion iShares U.S. Technology ETF IYW is one ETF for investors to consider ahead of a Fed rate hike, in part because the massive cash hoards held by companies such as Dow components Apple Inc. AAPL and Microsoft Corp. MSFT can help buffer these firms as rates rise.
“Technology companies hold a staggering 40 percent of the total corporate cash reserves in the U.S., according to Forbes, so they’re much less vulnerable to rising rates than debt-laden firms, such as utilities, according to Bloomberg data as of 07/13/2015. Their strong cash positions mean they have the potential to continue on with their shareholder-friendly policies, such as share buybacks, dividend increases and M&A activity,” according to a recent iShares note.
And if it is Apple via ETFs an investor is after, then look no further than IYW. With a 19.4 percent weight to the iPhone maker's shares, IYW is the epitome of an “Apple ETF.” None of the roughly 90 other ETFs that hold Apple have a weight to the stock that exceeds IYW's Apple allocation.
Apple's cash reserves were reported to be $203 billion as of late July. At the end of the second quarter, Microsoft, IYW's second-largest holding at a weight of almost 10.7 percent, had $96.35 billion in cash.
Adding to the case for tech in advance of a Fed rate hike is the fact that investors will not be paying up for that protection. Actually, they will get a discount relative to the S&P 500.
“While tech valuations have risen in recent months, current levels suggest that there may be additional room to run. As of last month, tech companies, as measured by the S&P 500 Information Technology Index, traded with a 6 percent price-to-earnings (P/E) discount to the S&P 500, well below the trailing 10-year average of a 12.7 percent P/E premium, according to Bloomberg data,” notes iShares.
IYW is off nearly six percent year-to-date. The fund charges 0.43 percent per year, or $43 for every $10,000 invested.
© 2022 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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