Where Tech Giants Exist In ETFs

With 185 S&P 500 constituents expected to report quarterly earnings results this week, many stocks will move higher or lower based on results and forward guidance. CFRA thinks it’s particularly important for investors to understand how this impacts ETFs and mutual funds in their overall portfolio.

The technology sector is expected to increase earnings by 15% in the second quarter, with further acceleration in the second half of the year according to S&P Capital IQ consensus estimates. Facebook and Intel, two tech heavyweights, are expected to report results after the close on Wednesday and Thursday, respectively. Given their size and fundamental traits, it’s no surprise many ETFs or mutual funds have one or both stocks inside.

ETF.com Stock Finder Tool

A new stock finder tool on ETF.com is a great resource for investors to understand how widely held individual stocks are.

In rating equity mutual funds and ETFs, CFRA combines holdings-level analysis with fund-specific metrics including expense ratio and standard deviation. We believe what’s inside a fund matters for future returns, and our deep team of equity analysts tracking earnings trends helps us stay on top of the fundamentals of these diversified products. We’ll be discussing this during Wednesday’s fund webinar.

CFRA Equity Analyst Scott Kessler sees Facebook continuing its strong operational and financial performance, and it is set to report second-quarter results today. CFRA projects earnings per share of $1.66 vs. $1.32, implying growth of 26%. Perhaps more importantly, Kessler sees revenue growth above 40% again, notwithstanding aftereffects from the Cambridge Analytica scandal.

Regulatory Pressure Lessening

Although the valuation seems reasonable to Kessler, he sees significant legal and regulatory risks as well as margin pressure. Ahead of the results, Kessler also has questions about Messenger monetization and progress at Facebook’s Oculus virtual reality business.

Fellow CFRA Equity Analyst Angelo Zino sees Intel meeting Q2 pre-announcement figures, and maintains that forward estimates remain conservative. According to S&P Capital IQ consensus estimates, operating earnings per share [EPS] for the June quarter are expected to be $0.97, while revenue is seen up 14% to $16.78 billion compared with $14.76 billion. Zino noted that S&P Capital IQ consensus estimates indicate September EPS of $1.08 and revenue of $17.6 billion, which implies growth of 9% over the prior year.

Zino expects commentary with regard to Intel's all-important Data Center Group to remain positive and be the core reason for the positive updated guidance in late June. He expects demand will continue to be driven by ongoing adoption of Intel Xeon Scalable processors, including for artificial intelligence workloads.

Big ETF Stakes

According to ETF.com, there are 239 ETFs that hold Intel and 204 with a stake in Facebook.

Beyond the obvious well-diversified S&P 500 and Russell 1000 index-based funds such as Vanguard 500 Index (VFINX) and the iShares Russell 1000 ETF (IWB), Facebook and Intel are currently large stakes in dedicated technology ETFs or quasi-tech ETFs such as the Technology Select Sector SPDR (XLK), the Vanguard Information Technology (VGT) or the Invesco QQQ Trust (QQQ); QQQ also holds some consumer discretionary and health care stocks.

However, due to the pending GICS sector realignment, this is the last quarterly result Facebook will post as part of the S&P or MSCI information technology sector before moving to communication services. XLK and VGT track indices based on the GICS framework, and Facebook will be part of multiple communications services sector funds.

Shifting Sands

Beyond Facebook and Intel, investors in XLK, VGT and QQQ should also pay attention to Juniper Networks, Qualcomm and Twitter, as these are among the 26 S&P 500 technology sector constituents scheduled to report this week.

In addition, Facebook and Intel are part of the iShares S&P 500 Growth ETF (IVW), along with Amazon and McDonald’s in consumer discretionary; Gilead Sciences and Merck in health care; and Boeing and United Parcel Service in industrials.

Yet the fellow growth ETF iShares Russell 1000 Growth (IWF) holds Facebook but not Intel. Indeed, the semiconductor company is part of the iShares Russell 1000 Value (IWD), highlighting that value or growth is in the eye of the index provider—S&P Dow Jones, FTSE Russell, etc.—and not an asset manager of an index fund.

Increasingly, investors are also looking to smart-beta ETFs and going beyond the traditional growth or value style box. When they do so, they will find Facebook and Intel inside some of them.

Examples

Dividend ETFs such as the O’Shares FTSE U.S. Quality Dividend ETF (OUSA), the Vanguard High Dividend Yield ETF (VYM) and the WisdomTree US Quality Dividend Growth ETF (DGRW) hold INTC as a major position, as does the iShares Edge MSCI U.S.A. Momentum Factor ETF (MTUM).

Meanwhile, ETFs such as the Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF (GSLC) and the Hartford Multifactor US Equity (ROUS), which combine multiple factors including momentum, quality and value, also favor INTC.

As you settle in for an active week of earnings season, make sure you understand the impact in both active- and index-based strategies. CFRA reports and screening tools on MarketScope Advisor can help you understand what’s inside diversified funds. To track earnings developments, a daily read of the research notes portion of the platform will be useful.

At the time of writing, neither the author nor his firm held any of the securities mentioned. Todd Rosenbluth is director of ETF and mutual fund research at CFRA, an independent research firm that acquired S&P Global Market Intelligence's equity and fund business in October 2016. He can be reached at [email protected]. Follow him on Twitter @ToddCFRA.