XNTK: Recent Outperformance, But Will Likely Lag Peers Long Term For 3 Reasons

seekingalpha05-04

Chris Ryan Investment Thesis SPDR NYSE Technology ETF (NYSEARCA:XNTK) warrants a hold rating due to several long-term factors impacting its expected returns. While the fund has outperformed peer tech ...

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While the fund has outperformed peer tech ...</p>\n\n<a href=\"https://seekingalpha.com/article/4689247-xntk-recent-outperformance-but-will-lag-peers-long-term\">Source Link</a>\n\n</div>\n","source":"seekingalpha_fund","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>XNTK: Recent Outperformance, But Will Likely Lag Peers Long Term For 3 Reasons</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nXNTK: Recent Outperformance, But Will Likely Lag Peers Long Term For 3 Reasons\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-05-04 03:57 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4689247-xntk-recent-outperformance-but-will-lag-peers-long-term><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Chris Ryan Investment Thesis SPDR NYSE Technology ETF (NYSEARCA:XNTK) warrants a hold rating due to several long-term factors impacting its expected returns. While the fund has outperformed peer tech ...</p>\n\n<a href=\"https://seekingalpha.com/article/4689247-xntk-recent-outperformance-but-will-lag-peers-long-term\">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":"LU0316494557.USD","symbol_name":"FRANKLIN GLOBAL FUNDAMENTAL STRATEGIES \"A\" ACC","start_time":0,"source_url":"https://seekingalpha.com/article/4689247-xntk-recent-outperformance-but-will-lag-peers-long-term","article_id":"2432813667","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/184629980/image_184629980.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2432813667","pubTimestamp":1714766241,"sourceInfo":{"source_id":"seekingalpha_fund","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Chris Ryan Investment Thesis SPDR NYSE Technology ETF (NYSEARCA:XNTK) warrants a hold rating due to several long-term factors impacting its expected returns. 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While the fund has outperformed peer tech ETFs over the past year, its equal-weighted strategy will likely lag cap-weighted funds. This is due to the advantages of larger, mega-cap companies including stronger financials, greater research and development investment, and qualitative factors that lead to greater acquisition of human talent. Fund Overview and Compared ETFs XNTK is a passively managed ETF that seeks to track the NYSE Technology Index. With its inception in 2000, the fund is relatively small with $736.44M in AUM. The ETF seeks to capture 35 leading U.S. tech companies that must meet specific criteria. To be captured in XNTK, a holding must have at least $2B in market cap and a 3-month average trailing daily traded value of $10M. Holdings must also meet specific criteria for growing sales and revenue. Finally, an important characteristic of XNTK is that it is an equal-weighted fund that rebalances annually. For comparison purposes, other funds examined are the Vanguard Information Technology ETF (VGT), the Invesco QQQ ETF (QQQ), and the Invesco S&P 500 Equal Weight Technology ETF (RSPT). VGT is a passively managed fund that captures tech holdings in the semiconductor, software, and technology hardware industries. QQQ seeks to provide investors with the 100 largest non-financial companies listed on the Nasdaq. It is therefore heavy in information technology at 58.94% weight. RSPT, like XNTK, utilizes an equal weighted strategy. The fund therefore has 50.77% weight on mid cap holdings in addition to large caps. Comparing Performance, Expense Ratio, and Dividend Yield The information technology sector has performed very well over the past decade, far surpassing the market overall. VGT has seen the best 10-year average annual return with an impressive 20.38%. The Vanguard fund has even outperformed QQQ, which saw an 18.60% average annual return over the past 10 years. Both these funds have a cap-weighted element to them and therefore are heavy on Microsoft Corporation (MSFT), Apple Inc. (AAPL), and NVIDIA Corporation (NVDA). In contrast, XNTK and RSPT, both equal-weighted funds, have not performed quite as well over the long term. XNTK, with its reduced weight on mega caps, has seen a slightly lower performance than peer tech funds with a 10-year average annual return of 18.51%. RSPT, another equal weighted fund, has a 10-year average return of 17.60%. All tech funds examined have strongly outperformed the S&P 500 index, which has seen a 12.8% 10-year average return. 10-Year Total Price Return: XNTK and Compared Tech ETFs (Seeking Alpha) XNTK has an expense ratio on the high end compared to peers at 0.35%. Unsurprisingly, Vanguard’s VGT has the lowest fees, with a 0.10% expense ratio. Because each of the funds captures companies focused on growth versus paying income through dividend payment, the fund’s yields are low. XNTK has a dividend yield of just 0.35%, the lowest of peer funds. Expense Ratio, AUM, and Dividend Yield Comparison     XNTK VGT QQQ RSPT   Expense Ratio 0.35% 0.10% 0.20% 0.40%   AUM $736.44M $77.63B $247.00B $3.69B   Dividend Yield TTM 0.35% 0.74% 0.57% 0.55%   Dividend Growth 5 YR CAGR -0.07% 8.75% 10.75% 2.25%   Click to enlarge Source: Seeking Alpha, 2 May 24 XNTK Holdings and Reasons Why It May Lag Cap-Weighted Tech ETFs XNTK is rebalanced annually in late December. Therefore, while it is equally weighted at each rebalance, its current distribution is a result of the performance of its individual holdings since last December. XNTK is also the least diversified tech ETF examined at just 35 holdings. Consequently, the fund offers a higher percentage weight per holding compared to equal-weighted RSPT. Top 10 Holdings for XNTK and Peer Technology Funds   XNTK – 35 holdings VGT – 313 holdings QQQ – 101 holdings RSPT – 67 holdings   NVDA – 4.57% MSFT – 18.31% MSFT – 8.47% MU – 1.88%   MU – 3.82% AAPL – 15.38% AAPL – 7.70% WDC – 1.83%   AVGO – 3.51% NVDA – 11.76% NVDA – 6.32% ZBRA – 1.81%   TSM – 3.44% AVGO – 4.24% AMZN – 5.32% TYL – 1.79%   AMAT – 3.44% CRM – 2.11% AVGO – 4.56% TER – 1.79%   META – 3.34% AMD – 2.11% META – 4.41% APH – 1.78%   LRCX – 3.22% ADBE – 1.65% GOOGL – 2.81% FSLR – 1.78%   ASML – 3.22% ACN – 1.57% GOOG – 2.73% PANW – 1.69%   QCOM – 3.20% ORCL – 1.50% TSLA – 2.59% MCHP – 1.69%   AMD – 3.18% CSCO – 1.46% CSCO – 2.43% ADI – 1.67%   Click to enlarge Source: Multiple, compiled by author on 3 May 24 As I will cover later, XNTK’s recent performance over the past year has been superior to peer funds. However, I do not see this as sustainable over the long term. Instead, funds like VGT and QQQ will outperform over the long term compared to equal-weighted tech funds. This is due to the financial strength of the largest mega-cap tech companies, their increased research and development investment, and greater attraction of human talent. Reason #1: Financial Strength and Greater Cash on Hand The first difference driving the largest mega-cap tech holdings to outperform over the long term is their fundamental financial strength. For example, smaller Applied Materials, Inc. (AMAT) reached #4 holding for XNTK since last December and has a market cap of $165B. Despite a one-year return of 76%, the company has a YoY EBITDA growth of -1.3% and YoY ROE growth of -8.95%. Lam Research Corporation (LRCX) also climbed to reach XNTK’s #7 holding with $116B market cap. However, the company also has seen growth issues, with -35% YoY ROE growth and -24% YoY revenue growth. In contrast, MSFT, with over $2T in market cap, has a 25% YoY EBITDA growth with 32% YoY operating cash flow growth. Additionally, Microsoft has seen consistent operating income growth for the past five years. NVDA, another mega-cap with over $2T in market cap, has experienced tremendous growth leading to strong financial metrics including a 409% YoY ROE growth, 125% YoY revenue growth, and 384% YoY EBITDA growth. Mega-caps that are heavily weighted with VGT and QQQ also have greater cash and short-term investments to survive economic storms. Apple, for example, has $73B in total cash and short-term investments. NVDA and MSFT also have $25.9B and $80B respectively, considerably higher than XNTK’s smaller holdings. Reason #2: Increased R&D Investment As a result of strong financials, mega-cap holdings have large research and development budgets, allowing their growth to further accelerate. Micron Technology, Inc. (MU) spent $832 million on research and development last quarter. By comparison, NVIDIA’s expenses on R&D were $2.46B. MSFT and AAPL both had R&D expenses between $7B and $8B last quarter. However, a company’s R&D investment means little without productive results. In 1992, Apple spent $602M on R&D. While this was significantly less than IBM at that time, Apple would soon overtake the declining tech giant. Therefore, one measurement of R&D productivity and innovation can be new patents awarded for a company. In 2020, Microsoft was awarded a staggering 2,905 patents, the fourth highest globally. Massive R&D expenditures keep mega-cap tech companies developing new technologies, therefore maintaining their growth. This benefits the cap-weighted nature of VGT and QQQ as these funds capture companies with increased R&D investment. Reason #3: Gravitational Pull of Talent A third, and perhaps most subjective factor why the largest mega caps have seen the strongest long-term returns in IT, is their attraction for human talent. In 1998, Steve Jobs said that “innovation has nothing to do with how many R&D dollars you have... it’s about the people you have.” One example of just how selective these companies has been seen with Google, which has recently been noted to have an applicant acceptance rate of just 0.2% for hiring. Increased creative freedom, visionary leadership, and innovative culture are more difficult to quantify but are nonetheless found in most mega-cap tech companies heavily weighted in VGT and QQQ. Current Valuation  XNTK outperformed all compared peer tech funds over the past year. Companies like Micron Technology saw an 81% price return and received a larger percentage weight with XNTK due to its equal-weight approach and the fund’s relatively few holdings. XNTK’s strong performance has resulted in a valuation that is higher than another equal-weighted fund, RSPT, but lower than cap-weighted VGT and QQQ. One Year Return for XNTK and Peer Tech Funds (Seeking Alpha) Despite XNTK’s lower P/E and P/B ratios than VGT and QQQ, I do not see the fund as a buy. I believe that the fundamental strengths of the mega-cap tech holdings will continue to drive outperformance for VGT and QQQ compared to equal-weighted XNTK and RSPT. This prediction is also consistent with the long-term performance over the past decade as previously discussed. Valuation Metrics for XNTK and Peer Competitors     XNTK VGT QQQ RSPT   P/E ratio 27.17 36.70 34.97 21.10   P/B ratio 6.49 8.40 12.18 4.54   Click to enlarge Source: Compiled by Author from Multiple Sources, 2 May 24 Risks to Investors XNTK and the other technology funds are focused on a particular market sector and inherently have increased volatility compared to broad market funds. Additionally, there is risk that the largest cap weighted tech holdings eventually lose their standing. For example, in 1990, the largest revenue-generating companies were General Motors (GM), Ford Motor (F), and Exxon Mobil (XOM). Disruptive new technologies and new companies eventually outpace and overcome stagnant ones. If history is any indicator of the future, this will happen again. Current juggernauts like Microsoft and Apple will eventually be dethroned. However, a key benefit of ETF investment, as opposed to individual stock selection, is that ETFs will seek to include these growing companies while discarding the decaying ones. Concluding Summary  While XNTK has outperformed other popular information technology ETFs over the past year, I believe the long-term trend of VGT and QQQ outperforming will prevail. Therefore, I rate XNTK a hold despite its more favorable valuation. Additionally, XNTK is the least diversified fund of tech ETFs examined. While dividend yield is not a significant factor considered, XNTK has the lowest yield along with a negative dividend yield 5-year CAGR. I believe funds like VGT and QQQ that follow a more cap-weighted strategy will outperform due to the unique qualities of mega-cap tech holdings. These qualities include their robust financial strength, greater capacity for R&D investment, and strong attraction for the best human talent.","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/2432813667"}