ETFs
FTEC ETF: Tech Now Near 30x Earnings With Powerful Momentum
LéoPatrizi
The AI arms race has never been more intense. At the closing bell last Wednesday, there were three companies worth more than $3 trillion, each from the information technology sector. In total, IT now represents 31.2% of the S&P 500 while the sector’s forward price-to-earnings ratio is 29.2x.
Cash continues to flow into the region and, according to Goldman Sachs, technology ETFs now represent almost 30% of all fund assets. But is there room for the glamor group to operate? In the short term, probably yes, but long-term valuations are concerning.
I have a hold rating on the Fidelity MSCI Information Technology Index ETF (NYSEARCA:FTEC). Unlike its popular counterpart, the Technology Select Sector SPDR® Fund ETF (XLK), FTEC is allowed to hold a significant stake in stocks beyond the largest pair of technology companies.
S&P 500 sector valuations
Set of facts
According to issuer, FTEC seeks to track investment returns that correspond, before fees and expenses, generally to the performance of the MSCI USA IMI Information Technology 25/50 Index. The index is made up of companies operating across all information technology sectors. FTEC invests in growth and value stocks of companies with diversified market capitalizations.
FTEC is a large ETF with over $10 billion in assets under management as of June 7, 2024. Its low Annual spending rate of 0.08% makes it an ideal stock for long-term investors looking for efficient access to the US IT space. In addition, the fund is at its lowest Dividend yield of 0.68% is a nice feature from a tax management perspective, but income investors would likely prefer to look elsewhere for yield.
Stock price dynamics has been very strong over the past few quarters, resulting in a top-rated A+ ETF rating from Seeking Alpha. The FTEC can be risky sometimes, as evidenced by its somewhat high annual standard deviation and concentrated distribution. But liquidity measures are strong — average daily volume is north of 200,000 shares while the fund’s 30-day median bid/ask spread is tight at just three basis points, according to Fidelity.
Zooming in on the portfolio, Morningstar’s 4-star Silver-rated ETF sits at the very top of the style box. Much of the allocation is actually original, given that there is a large exposure to megacaps. Around a fifth of FTECs are considered SMEs in terms of size, while there are only 5% invested in value stocks. With a P/E near 30 and long-term EPS growth of 15%, the PEG ratio is close to two – not exactly a good deal. Additionally, small-cap EPS growth is expected to outpace large-cap EPS growth in the second half of 2024, which could shift bullish focus away from mega-cap tech later this year.
FTEC: portfolio and factor profiles
The morning star
The growth of BPA Mag 7 is seen in decline
BofA Global Research
The fundamentals of the technology remain strong, unlike what was seen in C.2000
BofA Global Research
The real difference between FTEC and XKK lies in the weighting of each fund’s top 10 holdings. FTEC has invested a massive 46% in three stocks: Microsoft (MSFT), Apple (AAPL) and NVIDIA (NVDA). XLK, on the other hand, has a less than 6% stake in NVDA due to the fund’s size constraints.
So if you are looking for a technology ETF with significant exposure to NVDA, going with FTEC would make more sense. Any way you slice it, it’s essential to keep an eye on three great tech generals. Broadcom (AVGO) is the fourth largest position and this company reports its quarterly results later this week.
FTEC: high weight for the big three: MSFT, AAPL, NVDA
In search of Alpha
I mentioned earlier that there was probably room for FTEC to work in the short term. I make this statement in part because of seasonal bullish factors. The June to August period has been historically bullish over the past 10 years. Specifically, FTEC reported an average of 4.6% in July with a 100% positivity rate.
FTEC: very bullish summer trends
In search of Alpha
The technical take
Even though valuation is a risk and concentration a concern for FTEC, its technical situation remains firmly bullish. Note in the chart below that stocks are in a pronounced uptrend, as evidenced by a rising 200-day long-term moving average with price above both the 200-dma and the 50-dma. Additionally, FTEC bulls defended key support between $137 and $138 during the March-April pullback. The fund hasn’t quite gotten close to its 200dma as it did in October of last year. In fact, FTEC has been above the 200-day mark since a bullish golden cross in the first quarter of last year.
Long-term, I see an upside price target at $190 based on the cup-and-handle pattern’s high of $52 from late 2021 through Q4 of last year. If we add $52 to the breakout price of $138, we arrive at $190. With no natural sellers above last Friday’s closing price, the sky is clear.
Overall, FTEC is in a strong bull market, ideal for swing investors looking to take advantage of their momentum. Support is currently near $155.
FTEC: uptrend, 200-day rise, technical target at $190
Stockcharts.com
The essential
Although the technicals are strong, FTEC’s valuation is rich heading into the second half. These mixed characteristics lead me to maintain the rating, despite upward seasonal trends in the coming months.