Apple: Smart Beta ETFs’ Favorite Pick

Apple is a value stock. It’s also a growth stock, a momentum pick, a quality name and even a dividend darling.

When it comes to smart-beta ETFs looking to dice the market in factor slices, Apple is everywhere.

Apple is the largest company in the U.S., with a market capitalization of more than $823 billion, which makes it one of the top holdings in just about all market-cap-weighted U.S. large-cap equity ETFs.

It’s the biggest single holding in the two largest U.S.-listed ETFs: the SPDR S&P 500 (SPY) and the iShares Core S&P 500 ETF (IVV). Collectively, these two ETFs command some $360 billion in total assets, 8% of which is tied to Apple stock.

Plenty Of Apple To Go Around

But Apple is also found in strategies that go the smart-beta route. Today the company represents nearly 15% of the iShares Edge MSCI Multifactor Technology ETF (TCHF)—one of the biggest allocations to Apple in ETFs anywhere—and it’s found in the John Hancock Multifactor Technology ETF (JHMT), among many others.

What’s interesting is that the narrower in focus you go in the smart-beta ETF world, the more exposure to Apple you find. Apple is one of the biggest holdings in the iShares MSCI USA Value Factor ETF (VLUE), at nearly 10%. VLUE looks at fundamental metrics such as earnings, revenue and book value in search of undervalued stocks in each sector.

Apple is also in the iShares Russell Top 200 Growth ETF (IWY), at 9.3%, a fund that picks stocks based on two main growth factors: medium-term growth forecasts and historical sales per share growth. Apple offers value and growth—an unusual combination.

Factor-Model Efficacy

“The case of Apple calls into question the efficacy of many factor models. After all, it should be impossible for a stock to be both value and growth at the same time,” FactSet Director of ETF Research Elisabeth Kashner said. “But it turns out that Apple is an interesting case because of the relationship of Apple to the tech sector, and of the tech sector to the overall market.”

Specifically with regard to VLUE and IWY, the former’s underlying MSCI index looks for value stocks within each sector, “taking into account that price-to-book for a typical tech stock may be much higher than that of a financial stock,” Kashner added.

The Russell benchmark underlying IWY, meanwhile, picks stocks based on two main growth factors: medium-term growth forecasts and historical sales per share growth. By Russell’s methodology, Kashner notes Apple “is a growth stock only.”

The takeaway here is that MSCI and Russell have different metrics for value and growth. 

Gaining In Momentum & Quality ETFs

There’s more. Apple is among the holdings in momentum ETFs such as the SPDR S&P 1500 Momentum Tilt ETF (MMTM)—which weights securities based on market capitalization and price momentum—and the iShares MSCI USA Momentum Factor ETF (MTUM). MTUM not only looks for price appreciation as a momentum metric, but also for low volatility over the past three years. Apple meets both criteria.

“It’s not unreasonable to find positive price gains in a relatively undervalued tech stock that has growth properties overall,” Kashner said. 

Apple snags about 8% of the First Trust Nasdaq Technology Dividend Index Fund (TDIV), and is found in the Amplify YieldShares CWP Dividend & Option Income ETF (DIVO) and in dividend-focused ETFs from O’Shares and Fidelity. It’s a favorite dividend pick, too.

Mixed Behavior Making Sense

As Kashner put it, “We would think that a high-momentum growth stock would have a relatively low dividend yield, as a growth company will typically reinvest its earnings into valuable new business opportunities rather than return profits to shareholders. However, if we continue with the theory that AAPL is a value stock in a growth sector, this mixed behavior makes more sense.”

Apple is a quality stock, too. It’s in funds like the Fidelity Quality Factor ETF (FQAL), which looks at balance sheet quality metrics.

And if that’s not enough, Apple also makes it into environmental, social and governance (ESG) portfolios such as the FlexShares STOXX US ESG Impact Index Fund (ESG). 

ESG operates on a “totally different set of metrics that don’t really touch on valuation,” making it easier for tech firms to meet ESG requirements, because there’s usually a smaller environmental footprint associated with these companies, according to Kashner. 

ETFs With Biggest Allocations To Apple

A Symptom Of Indexing

The list goes on. Why? It has to do with index investing.

“Apple is a rare company, with a strong balance sheet, strong quality, and some value and growth characteristics,” said Todd Rosenbluth, director of ETF and mutual fund research at CFRA. “But we see this prevalence of Apple across all these index-based approaches, because different index providers have different rules, so a stock that may be value to one can be growth to another.”

This abundance of Apple access opportunities in all sorts of ETFs is anecdotally interesting, because it points to just how important index choice is.

It can also raise the question: How much Apple is too much?

“This [prevalence] is not a problem except for the fact that a lot of investors and advisors are buying these smart-beta ETFs based on name and cost structure alone, and may be unaware of just how exposed they can be to certain stocks,” Rosenbluth added. “You need to know your index.”

While no single answer applies to every type of investor, because tolerance to single equity risk is a personal choice, chances are that an ETF portfolio built of various smart-beta blocks may offer overlap in exposure to single stocks like Apple—the factor superstar.

Contact Cinthia Murphy at [email protected]