Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some technology companies to your portfolio but don't have the time or expertise to hand-pick a few, the Technology Select Sector SPDR ETF (NYSEMKT:XLK) could save you a lot of trouble. Instead of trying to figure out which stocks will perform best, you can use this exchange-traded fund to invest in lots of technology companies simultaneously.
Why this ETF and why technology companies?
Our growing world population will demand more and better high-tech products and services over time, boosting the business of successful technology-oriented companies. The folks at IDC, for example, have projected that the big-data market will grow 27% annually through 2017. More broadly, analysts at Gartner see global IT spending growing by 2.1% this year and close to 4% next year, and topping $4 trillion by 2018.
This ETF can have you instantly invested in tech-heavy companies. It sports a tiny annual fee of 0.16% and has outperformed the world market over the past three, five, and 10 years. It yields about 1.7%. It's bigger and cheaper than most peers, and with a solid track record, too.
A closer look at some components
On your own you might not have selected Texas Instruments (NASDAQ:TXN) or Micron Technology, (NASDAQ:MU) as technology companies for your portfolio, but this ETF included them among its 71 holdings.
Texas Instruments, the $53 billion semiconductor giant, has served new and old shareholders well, with its stock price rising 35% over the past year and averaging gains of nearly 12% over the past 30. All is not perfect with the company, though. It has been restructuring and has gotten out of the mobile-chip business after many device makers started developing their own chips in-house.
In the past few years, revenue has been shrinking, but profit margins have been growing -- suggesting that the company is engaged in more profitable operations. Bulls are optimistic about the company's growing analog chip and embedded processors businesses, as well as its prospects in the Internet of things, which features connected cars and connected homes.
With a forward P/E ratio near 18, Texas Instruments stock doesn't appear to be a bargain right now. It bears keeping an eye on, though, as it yields 2.5% and its dividend has been growing by an annual average of 22% over the past five years, with more room to grow. It's also dedicated to rewarding shareholders, spending most of its free cash flow on dividends and stock buybacks. Indeed, its share count has gone from roughly 1.7 billion in 2004 to 1.1 billion recently.
Micron Technology has also been enjoying rising profit margins, along with rising top and bottom lines and surging free cash flow. What's going on? Well, it has been benefiting from growing demand for memory, stabilizing prices, and its presence in iPhones, which are likely to experience a surge in sales with the upcoming iPhone 6. It's also building its solid-state drive (SSD) business, which uses NAND flash memory.
There are some reasons to worry. Micron's share count has nearly doubled since 2004, which hurts earnings per share. The company is addressing that by buying back convertible debt, but interested investors should keep an eye on this issue. Bears also worry about the commoditization of memory, the risk of falling prices, and tough competition. (Samsung might be ramping up its DRAM production, for example.)
Micron Technology's stock has soared more than 150% over the past year, but its P/E ratio near 11 suggests that it's still attractively priced. It pays no dividend, but management is being urged to institute one.
The big picture
It makes sense to consider adding some technology companies to your portfolio. You can do so easily via an ETF. Alternatively, you might simply investigate its holdings and then cherry-pick from among them after doing some research on your own.