The proliferation of ETFs has arguably been the best trend for ordinary retail investors during the last decade. Because they are composed of many different stock holdings, ETFs offer investors instant diversification, much like mutual funds. However, ETFs generally offer this diversification with lower fees, more price transparency, and better tax efficiency.
However, you should still learn about an ETF and the niche it represents before you buy a share of it. This is especially important in the fast-moving technology field. With that in mind, let's look at the top non-levered, non-inverse tech-sector ETF this week, with more than $200 million in assets under management and average-trading volume of 100,000 shares, which outperformed the Nasdaq Composite's 4% loss for the trading week ended Dec. 11.
A bad week spared nobody
Unfortunately for ETF investors, outperformance was a rather tenuous term this week. In what's widely considered a risk-off trade, as many are becoming increasingly fearful of the Fed raising interest rates and warning signs in the high-yield markets, the Nasdaq lost more than 2% on Friday alone. In the midst of this tough market, outperformance is a relative term, as higher-than-average correlations amid a sell-first, ask-questions-later market pulled down all tech-related ETFs.
Against that backdrop, the State Street's Global Advisors Technology Select SPDR ETF (NYSEMKT:XLK) , which is among one of the cheaper ETFs with an annual expense ratio of only 0.15%, slightly outperformed by posting a loss of 3.9% during the week. The slim difference between these two figures appears to be a trio of outperforming stocks in State Street ETF's top-ten holdings -- AT&T (NYSE:T), Verizon (NYSE:VZ), and Intel (NASDAQ:INTC) -- that are considered income investments as much as capital-appreciation plays.
Are valuations and yields important again?
For the telecoms, the combination of 5% yields and forward P/E Ratios of 11 times appeared to put the brakes on any large-scale declines. In the event there is a large-scale move away from high-yield "junk" debt, these stocks could serve as replacement income plays in a slow rising-rate environment. As opposed to the Nasdaq's 4% loss and the S&P's loss of 3.8%, Verizon only fell 1.9% this week, and AT&T fell 2.8%.
Intel, an actual member of the Nasdaq, also benefits from a rather modest forward P/E ratio of 14 times, and an above-average dividend yield of nearly 3%. In addition, an upgraded buy rating from Nomura Securities amid a price-target increase from $33 to $42 led to a loss of only 1.9% this week. Regarding the fund, with the help of these investments and other tech-income plays, the ETF yields 1.75%, with a P/E ratio of 17.
Interestingly enough, this was the week where yields and valuations appeared to matter. Does this portend a future move into higher-yielding, value-type investments as investors becoming more cautious?
It's too early to tell, but this week's outperformance by more reasonably valued investments should be monitored. For those looking for a low-cost way to add diversified technology exposure with yield to their portfolios, check out State Street's Technology Select SPDR ETF.