Yahoo Finance How Apple Product Launches May Change Your ETF
Apple-mania is back. Apple (AAPL) did what it does every September, placating fanboys and stirring Wall Street as it unveils its latest lineup of gadgets. This year's big items: The iPhone 6S, a new Apple TV and a souped-up iPad Pro.
Next up: The punditry.
After all, Apple is off some 13 percent from its July highs around $132 -- a level that AAPL shares have battled with on numerous occasions this year. The latest attack sent Apple down by as much as 20 percent, the losses helped in large part by August's broader-market selloff.
Naturally, then, investors are wondering whether this upcoming slate of Apple technology will be enough to start pushing the rock back up the hill. If you hold AAPL stock, you may have your head buried in the news for the next few days.
But even if you don't hold a single share of Apple stock, you might want to pay attention right now, says David Fabian, managing partner and chief operations officer of FMD Capital Management in Irvine, California. There are many exchange-traded funds that are heavy in AAPL stock.
"As the largest U.S.-listed stock, AAPL naturally will have a larger influence on market cap-weighted indices that many of these ETFs track," he says.
Apple is the biggest piece of the pie. Apple is an widely held stock, with more than 60 percent of shares owned by institutional investors and funds. And one thing you find is that in several places, Apple shares tend to clump together.
As much as we love touting the diversification benefits of ETFs, a great many of them are extremely overweight in Apple. Just a few examples:
-- iShares U.S. Technology ETF (IYW): 19.54 percent
-- Technology SPDR (XLK): 16.43 percent
-- Vanguard Information Technology ETF (VGT): 16 percent
-- iShares Global Tech ETF (IXN): 14.79 percent
-- PowerShares QQQ Trust (QQQ): 13.10 percent
In the case of IYW, for instance, that means Apple accounts for roughly a fifth of the fund's performance. Even in the case of the QQQ, which holds AAPL at "only" 13.10 percent, Microsoft Corp. (MSFT) is leagues behind at just 7.19 percent of the fund.
So, if you're invested in one or more of these funds, you should be poring over analysis about what Apple could do from here ... right?
Perhaps.
Below is a table looking at several periods where Apple was traveling from valley to peak or peak to valley. And the very first thing that's easy to notice is that as Apple goes, so do the tech-heavy ETFs.
Apple | IYW | XLK | VGT | IXN | QQQ | SPY | MSFT | ||
|---|---|---|---|---|---|---|---|---|---|
11/4/11 | 4/5/12 | 57.21% | 16.44% | 15.11% | 15.12% | 15.19% | 16.56% | 10.86% | 18.81% |
4/5/12 | 5/18/12 | -15.05% | -11.30% | -8.74% | -10.80% | -11.30% | -9.64% | -7.42% | -6.22% |
5/18/12 | 9/18/12 | 32.41% | 12.64% | 14.06% | 13.28% | 12.64% | 14.06% | 11.84% | 4.90% |
9/18/12 | 4/19/13 | -44.19% | -11.18% | -7.15% | -8.25% | -5.14% | -3.02% | 6.44% | -4.63% |
4/19/13 | 2/24/15 | 135.99% | 57.00% | 47.43% | 58.11% | 47.32% | 61.68% | 37.23% | 53.14% |
But while it's undeniable that AAPL had an awfully loud say in these ETFs' performance, there's enough here to suggest that Apple isn't shouldering the whole load.
The first bit is the performance of the Standard & Poor's 500 index, using the SPDR S&P 500 ETF (SPY) as a proxy. As you can see here, in four of these five periods, the tech ETFs weren't just heading in the same direction as Apple -- they were heading in the same direction as the broader markets.
What is significant, though, is the "kicker" Apple inevitably seems to add in all five time periods. In Apple's three bullish periods, the tech ETFs all outperform the SPY; in the bearish periods, they all underperform.
But also note the performance of Microsoft during all these periods, which directionally follows the same path as AAPL (though certainly lacking in magnitude). Considering that Microsoft is a rival to Apple in some arenas, while other parts of its business never lock horns with the tech giant, realize that what is pushing and pulling Microsoft is often going to be independent of whatever's moving Apple.
With MSFT stock also earning a large weight in all five tech-heavy ETFs, we can deduce Microsoft was helping to pull the wagon, too.
What does it mean? First and foremost, if you simply hold one or more of these tech-heavy ETFs as part of a buy-and-hold strategy, you can just go ahead and keep on living your life, Fabian says. Apple, Microsoft and other tech stocks will naturally ebb and flow as a part of their business; these funds should still deliver the growth that comes from the increasing presence technology has in our lives.
"The inherent diversification qualities of these sector funds allow for broader exposure to technology stocks, such as Internet and social media companies, that is outside of Apple's scope of influence," he says.
But if you're looking to enter one of these funds, or if you're looking to make a swing trade, how the market reacts over the next few months to Apple's deluge of product releases may very well come into play. It's pretty clear that a weak AAPL stock does tend to serve as an anchor on these funds, and that a rising Apple tide helps lift a number of boats.
If you're in the latter camp, you're best off following the iPhone 6S most closely, as iPhones account for a whopping 63 percent of the company's revenue, according to SEC filings.
"For Apple stock, the driver will be the iPhone," says Tom Taulli, author of various books, including "All About Short Selling," and editor of the IPO Playbook. "The problem is that these new products, while interesting, will probably take a few years to move the needle."
The new Apple TV may generate plenty of headlines on its own, and the iPad Pro's specs are simply head-turning, but financially speaking, neither product is as important to overall Apple revenue.
Also, while some might suggest investing in an ETF as a way to hedge your bets against a heavily weighted stock like Apple, avoid that strategy, Taulli says. If you want to make a "safer" play on a specific stock, you're better off trading options rather than exposing your investment thesis to the whims of a bunch of other ETF holdings.
"If you think there may be some downside risk on Apple stock, you might want to try selling puts against the stock," Taulli says, "This will essentially mean you will get to purchase the stock at a lower price if it falls. And if not, you will still get to keep the premium."
One last note: Many ETFs have similar overweights to companies like Exxon Mobil Corp.(XOM) and Procter & Gamble (PG) thanks to their enormous market capitalization, making it a little more important to follow those single-stock narratives if you're invested in those funds.
The lesson here: Always know what's in your funds.
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