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Don't Fret About Apple With This NASDAQ ETF

May 10, 2016 8:30 am
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Approximately 100 exchange-traded funds hold shares of Apple Inc. (NASDAQ: AAPL), and when investors start evaluating those ETFs that weigh holdings by market capitalization – a significant chunk of the ETF universe – they will find some funds have large, perhaps excessive exposure, to the iPhone maker.

Of course when Apple is soaring, investors rather like cap-weighted technology sector ETFs or traditional ETFs that track the NASDAQ-100, because those funds usually future double-digit exposure to the iPad maker's stock. There have been instances when Apple's share price was at or near all-time highs of some ETF's having weights of around 20 percent to the stock.

Related Link: Analysts At Baird, UBS Debate Apple’s Stock

Apple offers another reminder. During its ascent to legendary status, particularly during the twenty-first century, there have been bumps in the road. That means the stock, just like every other one on the market, does not move up in a straight line forever. When shares of Apple struggle, traditional NASDAQ and technology ETFs are often punished, but that is not the case for equal-weight offerings such as the Direxion NASDAQ-100 Equal Weighted Index Shares (NYSE: QQQE).

A Sanctuary Of An ETF

Year-to-date, QQQE has slightly lagged the traditional ETF version of the NASDAQ-100, but QQQE's 6 percent loss this year is just over half the 11.8 percent shed by Apple.

&ldquoApple posted a lower-than-expected 8 percent decline in earnings and a 12.8 percent decrease in revenue for Q2. What may be worse is its outlook for Q3, which cites continued macroeconomic headwinds and lower demand. The 7 percent drop in the company’s stock may be a wake-up call for Nasdaq-100 investors,” said Direxion in a recent note. “The benefit of most index funds is that they diversify away from single security risk by holding a broad basket of stocks, generally weighted by market cap, and instead isolate the ‘market’ risk of the index that you’re targeting.”

As Apple's decline has hastened, QQQE's advantages are becoming more clear. For example, the stock is down nearly 15 percent over the past month, sending the cap-weighted NASDAQ-100 to a loss of 2.5 percent. However, QQQ is off less than 2 percent over that stretch.

“If you are holding a market-cap weighted fund that tracks the Nasdaq-100, you have almost an 11.5 percent position in Apple and a 56 percent weighting in the information technology sector! Not to mention it’s the top holding of any index fund position you hold that tracks the S&P 500 index. So much for diversifying away from single-security risk. Given the Q3 outlook, it may be time to consider another approach,” added Direxion.

QQQE carries a five-star Morningstar rating.

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