Tech ETFs Give In To Apple & Google Blues

October 18, 2012

With Apple's stock faltering, investors seem to be rethinking technology funds.


Technology-sector ETFs have been on a tear this year, outpacing the S&P 500 index with double-digit gains, but that upward trend seems to be running low on steam, and many investors are reallocating assets into other sectors such as financials.

The change in momentum seems to be largely tied to Apple, though disappointing earnings from Google and IBM only serve to underscore how the Apple-heavy tech sector is suffering from weakening global growth.

Google's disappointing earnings, which were released accidentally during Thursday's trading session instead of after it, sent the company's shares down 9 percent. Google is the second-biggest technology company by market value. So Google now joins Apple, the biggest tech company, in dragging down tech ETFs.

Apple's stock price of the technology giant was trading as high as $705 a share about a month ago, but has since given up nearly 8 percent in value as the market came to terms with what it perceived as disappointing sales figures. Apple closed at $644.61 a share Wednesday.

Apple is the largest holding in many market-cap-weighted technology ETFs such as the $33.6 billion PowerShares QQQ Trust (NasdaqGM: QQQ) and the $9.8 billion Technology Select SPDR ETF (NYSEArca: XLK).

Those funds have slipped nearly 3 and 4 percent, respectively, in the past month alone. By comparison, the SPDR S&P 500 ETF (NYSEArca: SPY) is only down 0.4 percent in the same period. Apple represents roughly 20 percent of both QQQ and XLK’s portfolio, an allocation that allows the tech giant to have an undue impact on these funds.

What’s more, the drop in value in these funds has come hand in hand with sizable asset outflows. Indeed, both QQQ and XLK ranked among the week’s biggest redemptions in the five-day period ended Thursday, Oct 11. Investors yanked more than $1.1 billion out of QQQ and nearly $595 million from XLK, according to data compiled by IndexUniverse.

“People make stock-specific decisions because of Apple’s weight in these portfolios,” Paul Weisbruch of Street One Financial told IndexUniverse.

Apple’s stellar rally that had earned the company’s stock price gains of more than 60 percent in 2012 left a lot of investors with embedded gains in the stock, Weisbruch said, something that caused many to want to get out of the position now that the stock has corrected some.

“Some people are sitting on fairly nice gains if they’ve held the stock since the spring when it was in the $500s,” Weisbruch said.

He added that a lot of the redemptions taking place are also tax-related as the calendar year nears its end, a trend that should pick up pace in the next several weeks, especially for funds that have hefty allocations to a single stock as hot as Apple, he said.

“But investors aren’t racing out of the market and into cash,” he added. On the contrary, they are reallocating their money.


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