FTEC Vs. XLK: One Of Them Carries Excess Baggage

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Quardia/iStock via Getty Images Investment Thesis Generally, when investors think about investing in ETF themes related to the technology sector or the communication services sector, larger, well-...

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XLK: One Of Them Carries Excess Baggage\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-03-15 11:36 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4678402-ftec-vs-xlk-etf-one-of-them-carries-excess-baggage><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Quardia/iStock via Getty Images Investment Thesis Generally, when investors think about investing in ETF themes related to the technology sector or the communication services sector, larger, well-...</p>\n\n<a href=\"https://seekingalpha.com/article/4678402-ftec-vs-xlk-etf-one-of-them-carries-excess-baggage\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"DDOG","symbol_name":"Datadog","start_time":0,"source_url":"https://seekingalpha.com/article/4678402-ftec-vs-xlk-etf-one-of-them-carries-excess-baggage","article_id":"2419999401","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/944784934/image_944784934.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2419999401","pubTimestamp":1710473800,"sourceInfo":{"source_id":"seekingalpha_fund","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Quardia/iStock via Getty Images Investment Thesis Generally, when investors think about investing in ETF themes related to the technology sector or the communication services sector, larger, well-know","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"DDOG":"Datadog","LU0072462426.USD":"贝莱德全球配置 A2","AAPL":"苹果","BK4592":"伊斯兰概念","LU0208291251.USD":"FRANKLIN MUTUAL U.S. VALUE \"A\" (USD) INC","MSFT":"微软","ANET":"Arista Networks, Inc.","LU0308772762.SGD":"Blackrock Global Allocation A2 SGD-H","LU0417517546.SGD":"Allianz US Equity Cl AT Acc SGD","IE00BMPRXN33.USD":"NEUBERGER BERMAN 5G CONNECTIVITY \"A\" (USD) ACC","IE00BBT3K403.USD":"LEGG MASON CLEARBRIDGE TACTICAL DIVIDEND INCOME \"A(USD) ACC","IE00BSNM7G36.USD":"NEUBERGER BERMAN SYSTEMATIC GLOBAL SUSTAINABLE VALUE \"A\" (USD) ACC","VGT":"信息技术ETF-Vanguard","BK4587":"ChatGPT概念","LU0353189763.USD":"ALLSPRING  US ALL CAP GROWTH FUND \"I\" (USD) ACC","IE00BZ1G4Q59.USD":"LEGG MASON CLEARBRIDGE US EQUITY SUSTAINABILITY LEADER \"A\"(USD) INC (A)","IE00BWXC8680.SGD":"PINEBRIDGE US LARGE CAP RESEARCH ENHANCED \"A5\" (SGD) ACC","LU0061474705.USD":"THREADNEEDLE (LUX) GLOBAL DYNAMIC REAL RETURN \"AU\" (USD) ACC","BK4588":"碎股","LU0130102774.USD":"Natixis Harris Associates US Equity RA USD","LU2087625088.SGD":"ALLSPRING  US ALL CAP GROWTH \"A\" (SGDHDG) ACC","LU0158827948.USD":"ALLIANZ GLOBAL SUSTAINABILITY \"A\" (USD) INC","IGM":"iShares Expanded Tech Sector ETF","SA":"Seabridge Gold","LU0198837287.USD":"UBS (LUX) EQUITY SICAV - USA GROWTH \"P\" (USD) ACC","FTEC":"Fidelity MSCI Information Techno","IE00B1BXHZ80.USD":"Legg Mason ClearBridge - US Appreciation A Acc USD","LU0276348264.USD":"THREADNEEDLE (LUX) GLOBAL DYNAMIC REAL RETURN\"AUP\" (USD) INC","LU1861215975.USD":"贝莱德新一代科技基金 A2","LU0061475181.USD":"THREADNEEDLE (LUX) AMERICAN \"AU\" (USD) ACC","IE0002270589.USD":"LEGG MASON CLEARBRIDGE VALUE \"A\" (USD) INC","IE00BFSS8Q28.SGD":"Janus Henderson Balanced A Inc SGD-H","LU0672654240.SGD":"FTIF - Franklin US Opportunities A Acc SGD-H1","META":"Meta Platforms","LU0708995401.HKD":"FRANKLIN U.S. OPPORTUNITIES \"A\" (HKD) ACC","LU1861220033.SGD":"Blackrock Next Generation Technology A2 SGD-H","NVDA":"英伟达","IE0009356076.USD":"JANUS HENDERSON GLOBAL TECHNOLOGY AND INNOVATION \"A2\" (USD) ACC","IE00B19Z3581.USD":"Legg Mason ClearBridge - Value A Acc USD","XLK":"高科技指数ETF-SPDR","IE00B7SZLL34.SGD":"Legg Mason ClearBridge - Value A Acc SGD-H","IE00BLSP4239.USD":"Legg Mason ClearBridge - Tactical Dividend Income A Mdis USD Plus","MPWR":"Monolithic Power Systems","FDN":"First Trust Dow Jones Internet I","BK4529":"IDC概念","LU0109391861.USD":"富兰克林美国机遇基金A Acc","LU0238689110.USD":"贝莱德环球动力股票基金","LU1267930730.SGD":"富兰克林美国机遇基金AS Acc SGD (CPF)","LU0456855351.SGD":"JPMorgan Funds - Global Equity A (acc) SGD","BK4023":"应用软件"},"translate_title":"FTEC对XLK：其中一个带着超重行李","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"ANET":1,"XLK":1,"VGT":1,"SA":1,"NVDA":1,"MSFT":1,"MPWR":1,"META":1,"IGM":1,"AAPL":1,"FTEC":1,"DDOG":1,"FDN":0.9},"content_text":"Quardia/iStock via Getty Images Investment Thesis Generally, when investors think about investing in ETF themes related to the technology sector or the communication services sector, larger, well-known ETFs such as the Technology Select Sector SPDR (XLK) or the Vanguard Information Technology ETF (VGT) are some of the first choices that come to mind. The Fidelity MSCI Information Technology Index ETF (NYSEARCA:FTEC) is another ETF that may also be considered, given its close resemblance to the XLK fund that I will be expanding on below. With around $10 billion in managed assets, the FTEC fund is sizable enough to compete with the XLK at some level. However, when comparing the FTEC with its larger peer, the XLK, the former ETF does not look appealing enough in terms of performance. The FTEC fund vs the XLK fund and the benchmark index (SA charts) Moreover, U.S. equities in general appear to be exhausted as valuation levels start to get stretched. Even the FTEC's underlying index that it tracks implies some level of exhaustion. These reasons suggest the FTEC fund would be a Hold at best. About FTEC The Fidelity MSCI Information Technology Index ETF is owned and managed by multinational financial services company Fidelity Investments. The FTEC fund grants investors the opportunity to gain exposure to a wide range of technology firms, ranging from powerhouse names such as Microsoft (MSFT), Nvidia (NVDA), and Apple (AAPL) to other relatively smaller outperformers such as Datadog (DDOG), Arista (ANET) and Monolithic Power Systems (MPWR). According to the fund's literature made available by Fidelity, the fund's assets are deployed in a wide range of technology sectors, such as Application & Systems Software, IT Hardware, IT Consulting, Semiconductors and Communication Equipment and other Electronic systems sectors. The FTEC fund achieves its investment objective by tracking the underlying MSCI USA IMI Information Technology (IMI-IT) index, which is designed to capture the large, mid, and small-cap segments of the US equity universe, identified as IT sector stocks based on the GICS® classification. This means communication services stocks such as Meta Platforms (META) will not be a part of the fund's assets. Despite the FTEC's asset base being largely diversified, with over 303 stocks as part of the fund's portfolio, a significant part of the fund is deployed towards larger names in the U.S. IT sector, as can be seen in the chart below. It is this wide exposure to IT stocks that separates the FTEC from the XLK and its other peers. How FTEC fund compare to its peers (ETFdb) Peer comparison I view the peer comparison stage of FTEC vs. its peers as one step closer to understanding the key differences between this fund and its large peer, the XLK. I have added a peer comparison chart below that looks at a few metrics that help differentiate FTEC vs. XLK. I have also added the iShares Expanded Tech Sector ETF (IGM), which aims to offer a similar range of exposure to US tech stocks as the FTEC. But unlike the FTEC, the IGM also offers investors exposure to some communication sector stocks due to the underlying index it tracks. How FTEC fund compare to its peers (SA) First, the FTEC fund is the cheapest of the lot, setting investors back 8 cents for every hundred dollars invested in the fund. This is slightly lower than the 9 cents in expense fees to invest in the XLK fund. At the same time, the FTEC just edges past the XLK in terms of dividend yield. FTEC also appears well diversified on a comparative basis as compared to the XLK, with the IGM fund offering a similar breadth of exposure but at a higher expense ratio. However, the inherent theoretical advantages of asset diversification that can be implied by observing the Concentration Risk section above really seem to be less advantageous when comparing FTEC to the XLK in terms of past performance. Peer Performance On almost all mid-to-long-term horizons, the XLK beats both the FTEC and IGM funds, as can be seen in the chart above. Granted, on a short-term basis, FTEC might edge past the XLK on a trailing 1-month and 6-month basis if I add the capital appreciation gain and the annualized dividend yield, but most investors might hold these ETFs for longer periods, which makes the FTEC fund less appealing on a relative basis. Plus, I also wanted to take this performance analysis one step further and analyze how FTEC might perform against the XLK in periods of downturns, such as corrections and bear markets. Here's what I found below: The FTEC fund underperforms the XLK fund in downturns (SA Charts) In the chart above, I looked at FTEC's performance vs. the XLK and the IGM in three periods: 2022's bear market and the downturns during 2015-2016 and 2018. The FTEC and IGM funds have underperformed the XLK fund on a relative basis. Peer Holdings Comparison In the table below, I have slightly expanded the top holdings of all three funds to the top 15 holdings. Top 15 holdings of FTEC and its peers (ETFdb) From the table above, it is very visible how FTEC resembles XLK in the Top 15 holdings, more by the assets that it holds and less by the weight of each asset. FTEC still has about 67% of its assets deployed towards its top 15 holdings, as compared to 78% of XLK's assets deployed towards its own top 15 holdings. However, while the rest of the 22% of XLK's assets are distributed towards the remaining 51 stocks, the FTEC's remaining distribution is vastly different. 33% of the FTEC's remaining holdings after accounting for the top 15 are distributed towards over 300 stocks. To me, this appears as unnecessary excess baggage, not giving any real performance advantage to the FTEC when comparing it to the XLK. After thoroughly reviewing the performance and holdings and comparing FTEC to its peer, the XLK, I find that the appeal to investing in this ETF is not compelling enough. Valuation To estimate the approximate valuation levels of the FTEC, I will use the underlying IMI-IT index that the fund tracks. Per the index's fact sheet that I included in the About section, the IMI-IT index is trading at 28.9 times forward earnings, slightly higher than the S&P Technology Select Sector index's 28.5 forward PE, which is tracked by the XLK fund. The FTEC fund also trades at 10.9 times its book value, which is again higher than the Technology Select Index's 8.4 times book value. Both of these metrics imply that the FTEC trades at a premium valuation that is moderately higher as compared to the XLK. Add to that the peer performance review and holdings comparison that I reviewed earlier, and FTEC does not look appealing even at valuation levels. Moreover, I had just reviewed the XLK fund, last week, where I added my analysis of how the entire tech sector may be trading in the fair value range at the moment. I believe investors would also benefit from that research. Risks & Other Factors In terms of risks, higher dollar rates, surprise inflation upswings, and higher interest rates would be the usual suspects that may cause headwinds to the stocks that are held by the FTEC fund. Inflation looks to be sticky at current levels, which may pose some issues for the narrative that rates may be cut. If the Federal Reserve is forced to raise rates, the performance outlook for all technology stocks and ETFs, including FTEC and XLK, will erode. Takeaway  FTEC does offer investors an alternative to gain exposure to the technology sector. The low fees offer a good reason for investors to invest in the fund. However, a comprehensive review of FTEC's performance, holdings, and valuation suggests that its direct peer XLK offers superior risk/reward as compared to FTEC. For the reasons listed above, FTEC will be a Hold.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2419999401"}