After lagging for most of 2013, technology stocks have strongly reappeared this year with substantial improvements in earnings and revenue growth rates as well as beat ratios. The sector emerged as a winner in the Q2 earnings season exhibiting the third highest earnings growth rate among the 16 sectors.
The technology sector delivered an earnings beat ratio of 64.1% and revenue beat ratio of 65.6%. Total revenue for the S&P 500 tech companies are up 5.9% so far, on an annual basis. Most of the sector bellwethers including Intel, Google and Apple came up with strong results. In short, performance has been much better than what we saw in the last few quarters.
Improving fundamentals across the globe, improving overseas demand and rising global IT spending are fueling growth in the tech stocks. Demand for products ranging from networking equipment to mobile-phone components are also rebounding. Per Gartner, global IT spending is expected to rise 2.1% in 2014 and 3.7% in 2015.
In the wide array of technology stocks, semiconductors have shown immense improvement this year. About 57.8% of earnings growth has come from semiconductor electronics with 80% earnings beat, followed by 31.8% growth in miscellaneous technology.
Also, the U.S. economy has stepped up enough to push high growth sectors like technology a few notches higher. In Q2, the economy expanded about 4% and is still delivering upbeat data on every aspect.
As a result, pure semiconductor ETFs or tech ETFs with higher exposure to semiconductor and high-potential miscellaneous tech stocks are worth a look at the current level. Total earnings for the Technology sector are expected to be up 12.5% this year on 4.6% higher revenues. Earnings growth is expected to be 12.2% in 2015 with 6% revenue growth, per Zacks Earnings Trend.
Investors should note that there are several ETFs which have bettered the performance this year of the biggest tech ETF S&P SPDR Technology ETF (NYSEARCA:XLK) which has amassed about $13.9 billion so far. Around 6.5 million shares of XLK change hands every day. Below, we have highlighted three ETFs that have easily crushed this popular over the last three months, but have often been overlooked by investors.
SPDR S&P Semiconductor ETF (NYSEARCA:XSD)
This ETF is leading the broad tech world this year having returned nearly 27%. XSD tracks the S&P Semiconductor Select Industry Index and holds 50 stocks in its portfolio. The product provides huge diversification benefits across each security as none of these are allocated more than 3.1% of the total assets (read:2 Hot Summer ETFs Surging to #1 Ranks).
However, the fund is less popular and illiquid with AUM of $205 million and has an average daily volume of around 100,000 shares a day. Expense ratio is the lowest at 35 bps when compared to other semiconductor products in the space.