ETFs
First quarter results boost sector ETFs
I am a former stock analyst responsible for publishing communications services and information technology stocks. Although I don’t miss covering multiple earnings calls in a day, I appreciate the impact these quarterly updates have on stock ETF returns.
The first quarter 2024 earnings season ended better than expected. S&P 500 companies generated 5.7% year-over-year profit growth as of May 17, according to FactSet. This has helped general stock index ETFs climb higher and gain popularity.
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Distribution of sector profits
“Communications services, consumer discretionary, information technology and utilities have been driving this strength,” said Christine Short, head of research at Wall Street Horizon, a TMX company. Mega-cap growth stocks delivered their first quarter results after a strong 2023.
In the communications services sector, Alphabet and Meta led growth, while Amazon and Microsoft did so in the consumer discretionary and information technology sectors. Short noted that Nvidia had not reported quarterly results but expected it to show strength. Utilities was the only sector not driven by one or two mega-caps according to Wall Street Horizon.
Looking ahead to the second calendar quarter, Short noted that the S&P 500’s communications services and information technology sectors are expected to maintain their leading positions. At the same time, due to difficult comparisons, Amazon’s profit growth is expected to slow. With consumer spending slowing, Short doesn’t expect other consumer discretionary companies to provide enough help to compensate.
Where did the ETF money go?
According to State Street Global Advisors analysis, information technology ETFs collected $8.6 billion in net inflows in the quarter ended April. Consumer Discretionary and Industrials were the only two other sectors to exceed $1 billion in new money during this period. Communication services ETFs collectively saw net inflows of $227 million. At the same time, funds in the consumer staples, healthcare and utilities sectors saw significant net outflows.
In April, consumer discretionary ETFs saw redemptions, while information technology and energy and financials were in favor.
What’s in Popular Sector ETFs
Before we talk more about communication services and information technology ETFs, let’s remember that a sector classification is very important. People regularly call the above companies tech stocks. However, this is not true. The S&P Dow Jones and MSCI indices take into account communications services companies Alphabet and Meta as well as information technology companies Microsoft and Nviaia. These index provider classifications are important when looking inside many sector ETFs.
Th Sector SPDR ETF Selected for Technology (XLK A) raised $1.3 billion between February and April. The $66 billion fund most recently held a 23% stake in Microsoft. Nvidia was in fourth place, with 4.6% of assets. Apple (21%) and Broadcom (4.8%) were the second and third largest holdings. The ETF has 67 stocks, all members of the large-cap S&P 500 index.
THE Vanguard Communications Services ETF (VOX B) raised about $100 million in the three months ended in April. The $4.1 billion fund invests in more than 100 large-, mid-, and small-cap communications services companies within an MSCI index. Meta platforms accounted for 20% of VOX’s assets, while Alphabet’s two share classes accounted for 25%. Comcast, Walt Disney and Verizon Communications were also among the top 10 holdings.
Many stock analysts are recovering from a busy earnings season. In the meantime, I’m curious to see if XLK and VOX continue to gain favor with investors positioning ahead of the June quarterly earnings season.
For more information, please visit VettaFi.com | ETF Trends.