Tech Investors Bracing For Potential 2017 Losses

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With the VIX (Volatility Index) itself falling below $12 this morning on what looks like optimistic investor expectations throughout the end of 2016 and into next year, some portfolio managers may find opportunities to hedge portfolios on out-of-favor puts.

We have seen some evidence of this in sector ETF, XLK (SPDR Technology Select Sector, Expense Ratio 0.14%, $12.6 billion in AUM) involving December 45.50 strike puts which are about 3.5% out-of-the-money at present levels. To put things in context, XLK has not traded this low since mid-September, and that was a brief one day touch before spending months above those levels.

Year-to-date, the fund has had some trouble in terms of asset gathering, as it actually has seen more than $1.4 billion leave the doors via redemption flows in spite of market outperformance. Notably, AAPL is the largest weighting within XLK at 13.41%, but the stock has lost some ground in terms of its relative market cap size to the second ranked holding MSFT (10.57%) this year, thanks to stock prices moving (AAPL has notably under-performed the broad market while MSFT is roughly in line with the SPY).

XLK-2016-12-06

There are seventy-three holdings in all within XLK, with the top ten following AAPL and MSFT rounding out as follows: 3) FB (6.19%), 4) T (5.35%), 5) GOOGL (5.15%), 6) GOOG (5.04%), 7) VZ (3.79%), 8) INTC (3.71%), 9) CSCO (3.39%), and 10) V (3.30%). In spite of the fund’s title being specifically that of “Technology,” a more intense breakdown of the underlying industry sectors contained within the portfolio reveals that only about 79% of the portfolio is technically invested in “Technology,” with 10% being invested in Communication Services (T, VZ, and others), 7% invested in Financial Services (no doubt technology companies within Financial Services in V), and a small 1% slice devoted to Consumer Discretionary.

In spite of year-to-date outflows in XLK, it still remains the largest “Technology” sector ETF in the U.S. listed universe ahead of the $9.8 billion VGT (Vanguard Information Technology, Expense Ratio 0.14%), which has pulled in over $765 million in new assets in 2016. Given the interest we have noticed in downside puts here in XLK, it makes sense to also watch the daily levered bear TECS (Direxion Daily Technology Bear 3X, Expense Ratio 0.95%, $19.3 million in AUM) as well for a potential uptick in trading activity.


Disclaimer: The content of this article is excerpted from a daily newsletter from Street One Financial. While ETF Daily News may edit the contents and add a relevant title to the piece, the author, Paul Weisbruch, does not endorse or recommend any issuer or security mentioned herein.

About the Author: Paul Weisbruch
paul-weisbruchPaul Weisbruch is the VP of ETF/Options Sales and Trading at Street One Financial. Prior to joining the team at Street One, Paul served as the Director of RIA and Institutional ETF Sales at RevenueShares ETFs from December 2007 until November of 2009. Before RevenueShares, Paul was employed by Susquehanna International Group from 2000 until 2007 serving in roles including OTC/NYSE Institutional Block Trading, Nasdaq/OTC Market Making, ETF/Derivatives Intelligence and Strategy, Algorithmic Trading, as well as acting as the PHLX Floor Specialist in the ETFs, SPY and DIA.Paul has been actively involved in the ETF space from both a product and trading standpoint since 2000. Additionally, Paul has well forged relationships with national RIAs, institutional pension fund managers and consultants, mutual fund and hedge fund managers, and also the ETF media. Co-authoring the “S1F ETF Daily” since 2009, the daily piece has become a must for many portfolio managers in the ETF space, with segments regularly appearing in the likes of Barron’s, WSJ, and ETFTrends.com for instance.

He holds his Series 4 (Registered Options Principal), 6, 7, 55 (Equity Trader), 63, and 65 licenses. He graduated from the University of Pittsburgh (B.S. – Economics), graduating magna cum laude, and has an MBA from Villanova University.