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Where The Cash Is At Among Sector ETFs

September 20, 2016 8:26 am
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Up nearly 12 percent year-to-date, the Technology SPDR (ETF) (NYSE: XLK) is the third-best sector SPDR exchange-traded fund this year. That alone implies XLK, the largest technology ETF by assets, merits another look, but there are more reasons to revisit XLK and rival technology ETFs.

It’s More Than Just Size

As has been previously noted, the technology sector, the largest sector allocation in the S&P 500, is home to some of the most cash-rich companies in the United States. Sure, the likes of Apple Inc. (NASDAQ: AAPL) and Google parent Alphabet Inc. (NASDAQ: GOOG) (NASDAQ: GOOGL) stash the majority of their cash overseas, but that does not change the fact that some XLK holdings have bundles of green.

In fact, XLK and competing tech ETFs are akin to the 1 percent.

The 1%

“The top 1 percent of cash-rich companies, of all US companies, control over 50 percent of all US corporate cash. Of that top 1 percent, the five most cash-rich companies are Apple, Microsoft, Google, Cisco, and Oracle, all of which hold the majority of their cash in overseas locations,” said Rareview Macro founder Neil Azous in a note out Monday.

Related Link: Social Media ETF Still Offers Growth Potential

The stocks mentioned by Azous combine for nearly 42 percent of XLK's weight, though the comments were made more in relation to opportunities with corporate bonds issued by these tech titans. Azous noted that technology corporate bonds are being assigned higher risk premiums due to concerns of higher taxation overseas and the use of corporate debt to fund buyback programs.

Looking At LQD, Too

The iShares iBoxx $ Invest Grade Corp Bd Fd (NYSE: LQD), the largest corporate bond ETF, features four members of XLK's top 10 holdings among its top 10 roster, including Apple and Microsoft Corporation (NASDAQ: MSFT).

In addition to being one of the biggest contributors to the buyback boom of recent years, technology stocks have also been major drivers of the S&P 500's dividend growth since the financial crisis. In fact, technology is now one of the benchmark U.S. equity index's biggest dividend-paying groups in dollar terms.

XLK's trailing 12-month dividend yield, though not whopping at just under 1.8 percent, is still several basis points higher than the yield on 10-year Treasurys.

Although it is home to some of Corporate America's most prolific cash generators, XLK has lost $1.77 billion in assets this year.

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