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The Temptation Of Technology ETFs

March 16, 2018 11:21 am
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The Temptation Of Technology ETFs

Technology was the best-performing sector in the S&P 500 last year and is doing its part to prop U.S. stocks in 2018. The iShares U.S. Technology ETF (NYSE:IYW) is up about 11 percent year-to-date.

Technology is the largest sector weight in the S&P 500 and as a result of that status, is a major driver of the performance of U.S. equities. Over the past five years, the sector has accounted for about 30 percent of the S&P 500's gains, according to BlackRock. Additionally, technology companies are notching positive earnings surprises in a big way.

“This reporting season, 88 percent of IT companies in the S&P 500 Index posted positive earnings surprises — the highest proportion of all the sectors — while recording 22.5 percent aggregate year-on-year earnings growth compared to the broad Index’s 14.3 percent,” said BlackRock.

Grab Some Apple

The $4.43-billion IYW holds 140 stocks and follows the Dow Jones U.S. Technology Index. Among technology exchange traded funds, IYW has one of the largest weights to Apple Inc. (NASDAQ:AAPL). IYW allocates 16.2 percent of its weight to Apple, 340 basis points more than the fund dedicates to Microsoft Corp. (NASDAQ:MSFT), its second-largest holding.

Apple and Microsoft, two of the largest components in the Nasdaq-100 Index, are up 5.7 percent and 9.9 percent, respectively, year-to-date. The two share classes of Google parent Alphabet Inc. (NASDAQ:GOOGL) combine for 12.2 percent of IYW's roster.

The technology sector “allows investors to tap into large scale, transformational shifts in the way entire industries operate —whether it be the growth of 'big data,' cloud-based enterprise and infrastructure solutions, cyber security or the intrinsic importance of semiconductors,” said BlackRock.

Cash Flow

IYW's trailing 12-month dividend yield is just 0.76 percent, but that should not diminish the ETF's potential as a destination for investors seeking shareholder rewards, including dividends and buybacks. Not when so many large- and mega-cap technology companies are flush with cash.

“In addition, one of the consequences of the recent tax legislation is the prospect of companies repatriating cash back to the U.S. at favorable rates,” said BlackRock. “This increases the potential for dividends, share buybacks or increased mergers and acquisition activity. At the same time, increasing capital expenditure or research and development spending may be supportive of the sector in the longer term.”

Six of IYW's top 10 holdings, including Apple and Microsoft, have been steadily raising dividends in recent years.

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