FTEC: Technology Dashboard for November (NYSEARCA:FTEC)

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jiefengjiang

This monthly article series features a dashboard of aggregated industry metrics in technology and communications services. It can also be used as a top-down analysis of technology ETFs such as the Fidelity MSCI Information Technology Index ETF (NYSEARCA:FTEC) whose largest holdings are used to calculate these metrics.

shortcut

The next two paragraphs in italics describe the dashboard methodology. They are required for new readers to understand the metrics. If you are used to these series or short on time, you can skip them and go to the charts.

base metrics

I calculate the median of five fundamental metrics for each industry: Earnings Yield (“EY”), Sales Yield (“SY”), Free Cash Flow Yield (“FY”), Return on Equity (“ROE”), Gross Margin ( “GM”). The reference universe includes large companies in the US stock market. The five basic key figures are calculated for the last 12 months. The same applies to everyone: higher is better. EY, SY, and FY are medians of the reciprocals of price/earnings, price/sales, and price/free cash flow. They lend themselves better to statistical studies than price-to-something ratios, which are useless or unavailable when the “something” is near zero or negative (e.g. companies with negative earnings). I also look at two momentum metrics for each group: mean monthly return (RetM) and mean annual return (RetY).

I prefer medians to averages because a median divides a set into a good half and a bad half. A cap-weighted average is skewed by extremes and the largest companies. My metrics are designed for stock selection rather than index investing.

Value and quality indicators

I calculate historical baselines for all metrics. They are labeled EYh, SYh, FYh, ROEh, GMh, respectively, and are calculated as average values ​​for an 11-year look-back period. For example, the value of EYh for hardware in the table below is the 11-year average median earnings yield at hardware companies.

The Value Score (“VS”) is defined as the average % difference between the three valuation metrics (EY, SY, FY) and their baselines (EYh, SYh, FYh). In the same way, the quality score (“QS”) is the average difference between the two quality scores (ROE, GM) and their baselines (ROEh, GMh).

The values ​​are given in percentage points. VS can be interpreted as percentage of under- or overvaluation relative to baseline (positive is good, negative is bad). This interpretation needs to be treated with caution: the baseline is an arbitrary reference, not an assumed fair value. The formula assumes that the three valuation metrics are equally important.

Current data

The next table shows the metrics and ratings at the end of the last week. Columns represent all of the above and defined data.

vs

QA

EY

SY

GJ

ROE

GM

Ah

SYh

FYh

ROEh

GMh

RetM

RetY

hardware

26.85

-0.51

0.0649

1.3399

0.0238

7.81

38.69

0.0363

0.9351

0.0407

7.35

41.77

16.76%

-15.32%

Come equip.

-36.84

3.74

0.0285

0.1837

0.0135

18.97

55.21

0.0314

0.2785

0.0412

15.70

63.72

12.23%

-2.68%

entertainment

-29.31

-35.01

0.0138

0.6452

0.0146

6.42

41.99

0.0492

0.4428

0.0381

17.20

45.32

10.03%

-31.16%

electronic equipment

-25.57

20.05

0.0396

0.5996

0.0231

04/17

38.68

0.0433

0.8108

0.0399

12.96

35.61

16.48%

-11.59%

software

-28.88

-2.59

0.0209

0.1192

0.0252

17.45

82.84

0.0270

0.1743

0.0373

17.71

86.05

8.45%

-45.51%

telecom

-21.40

-8.67

0.0358

0.8425

0.0095

10.06

57.14

0.0502

0.6516

0.0270

11.81

58.61

11.23%

-34.08%

semiconductor

-0.36

20.73

0.0557

0.2228

0.0320

33.34

62.67

0.0467

0.2482

0.0356

23.69

62.22

24.89%

-26.71%

IT service

-24.75

9.81

0.0344

0.2182

0.0235

04/33

50.26

0.0387

0.3313

0.0331

25.61

55.48

5.00%

-24.40%

Value and quality chart

The next chart shows Value and Quality Score by industry (higher is better).

value and quality in engineering

value and quality in engineering (Graphic: Author; Data: Portfolio123)

development since last month

In hardware and telecommunications, the value and quality indicators collapsed sharply.

fluctuations in value and quality

fluctuations in value and quality (Graphic: Author; Data: Portfolio123)

momentum

The next chart shows impulse data.

momentum in technology

momentum in technology (Graphic: Author; Data: Portfolio123)

interpretation

Hardware is undervalued by about 27% compared to the 11-year average and is close to its quality base. Semiconductors are close to baseline in value and above baseline in quality. Other industries are overrated by 21% to 37% on the same metrics. Good quality values ​​can partially justify an overvaluation of IT services and electronic devices.

Focus on FTEC

The Fidelity MSCI Information Technology Index ETF has been tracking the MSCI USA IMI Information Technology 25/50 Index since October 21, 2013. It has a total expense ratio of 0.08%, which is slightly cheaper than other passive index ETFs in the same sector, such as Communication Services Select Sector SPDR Fund (XLK) and Vanguard Information Technology ETF (VGT) (0.10%). As of this writing, the fund holds 381 shares. The next table shows the top 10 stocks with basic valuation and growth metrics. Their total weight is 59.1%. The two largest holdings (Apple Inc and Microsoft Corp) together weigh 40.2%, which poses a high risk exposure associated with these companies.

ticker

Surname

Weight%

EPS growth %TTM

P/E TTM

P/E fwd

Yield%

AAPL

apple inc

23.25

8.83

24.59

09/24

0.61

MSFT

microsoft corp

16.95

3.73

07/26

25.43

1.12

v

Visa, Inc.

3.52

25.45

30.50

25.29

0.86

NVDA

NVIDIA Corp.

3.48

8.85

54.66

49.86

0.10

MA

Mastercard, Inc.

2.93

23.12

34.31

32.59

0.57

AVGO

Broadcom, Inc.

1.97

70.17

22.85

13.97

3.13

CSCO

Cisco Systems, Inc.

1.94

12.84

15.92

12.74

3.39

ACN

Accenture PLC

1.85

01/17

27.32

25.65

1.53

CRM

Salesforce, Inc.

1.67

-78.58

302.93

34.22

0

ADBE

Adobe, Inc.

1.55

-16.14

34.10

25.39

0

Data calculated with Portfolio123.

Since inception in October 2013, FTEC has underperformed XLK slightly, but the difference between the annualized return and risk metrics is insignificant.

total return

Yearly. To return

retreat

Spicy

volatility

FTEC

345.96%

17.96%

-36.82%

0.91

19.00%

XLK

352.73%

18.16%

-35.48%

0.94

18.32%

FTEC is a low fee fund for investors looking for capital weighted exposure to the technology space. It holds many more shares than XLK (currently 381 vs. 78), but past performance is very close. Investors willing to hold a position in the technology space for the long term can indifferently choose FTEC or XLK. Liquidity makes XLK a better choice for tactical allocation and trading. For those looking to limit exposure to Apple and Microsoft, the Invesco S&P 500 Equal Weight Technology ETF (RYT) is a better choice.

Dashboard list

I use the first table to calculate value and quality ratings. It can also be used in a stock picking process to check how companies are performing compared to their peers. For example, the EY column tells us that a hardware company with an earnings yield above 0.0649 (or a price-to-earnings ratio below 15.41) is in the better half of the industry on this metric. Each month, a dashboard list is sent to Quantitative Risk & Value subscribers, where the most profitable companies simultaneously rank in the better half of the peer group on the three valuation metrics. The following list was sent to subscribers a few weeks ago based on the data available at the time.

AOSL

Alpha & Omega Semiconductor Ltd.

CLICK

Kulicke & Soffa Industries, Inc.

THREE

Thyv Holdings, Inc.

ZD

Ziff Davis, Inc.

SWKS

Skyworks Solutions, Inc.

DIOD

Diodes, Inc.

It is a rotating list with a statistical bias towards long-term excess returns, not the result of an analysis of each stock.

Source

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