Top Ranked Technology Sector QTEC ETF In Focus
After lagging for most of 2013, technology stocks have shown a nice comeback with substantial improvements in earnings and revenue growth rates as well as beat ratios. Shares of large cap companies are surging with most of them hitting new highs.
In fact, technology has been the second best performing sector with an earnings beat ratio of 85.7% and revenue beat ratio of 76.8%, trailing aerospace which saw an earnings and revenue beat ratio of 88.9% each. Total earnings for the S&P 500 tech companies that have reported so far are up 5.6% on an annual basis while revenues increased 5.2%.
This is especially true given that some of the top players such as Facebook (FB), Microsoft (MSFT), Cisco (CSCO), Oracle (ORCL), Google (GOOG), F5 Networks (FFIV) either emerged winners on both revenue and earnings fronts, or have shown an incredible run in their share price (read: 3 Tech ETFs to Watch on the Microsoft Earnings Beat).
Further, improving fundamentals across the globe are fueling growth in the tech stocks. Overseas demand is improving and global IT spending is rising while the dollar is weakening on soft U.S. data. Market fundamentals for the firms that make products ranging from networking equipment to mobile-phone components are also rebounding.
Given bullish trends in the entire industry, it is prudent to focus on the broad play rather than a specific corner of the space. One way to find a top ranked ETF in the tech space is by using the Zacks ETF Ranking system.
About the Zacks ETF Rank
A look at the top ranked tech ETFs can be done by using the Zacks ETF Rank. This technique provides a recommendation for the ETF in the context of our outlook of the underlying industry, sector, style box or asset class. Our proprietary methodology also takes into account the risk preferences of investors.
The aim of our model is to select the best ETFs within each risk category. We assign each ETF one of the five ranks within each risk bucket. Thus, the Zacks Rank reflects the expected return of an ETF relative to other ETFs with a similar level of risk.
Using this strategy, we have found one ETF – First Trust NASDAQ-100-Technology Sector Index (NASDAQ:QTEC) – that has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with a ‘Medium’ risk outlook.
QTEC: A Strong Buy
This ETF offers broad exposure to the tech sector of the U.S. equity market by tracking the NASDAQ-100 Technology Sector Index. In total, the fund holds a small basket of 40 securities that are weighted equally with no single company making up for more than 3% share in the basket.
The best thing about the equal weight approach is that performance is not heavily dependent on the returns of a particular stock or group of securities. Further, with quarterly rebalancing, equally weighted stocks tend to cash in on the overvalued sub-segments and reinvest in the underperforming ones, potentially allowing for outperformance if the trends reverse.
The product has a tilt toward the large cap and growth stocks as about 90% of the portfolio falls in the large cap category while about half of it is classified as growth. NXP Semiconductors (NXPI), FFIV, Akamai Technologies (AKAM), Facebook and Adobe Systems (ADBE) occupy the top five positions in the basket.