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Everything You Need to Know About the XLK ETF

The stock market has been set afire for the past month in the wake of Donald Trump's election victory. The Standard & Poor's 500 index is up 3 percent, driven by go-go gains in financials (4.7 percent), materials (6.9 percent) and industrials (8.5 percent).

But technology stocks -- the market's dependable source of growth -- are as flat as a pancake.

While a number of market sectors have come sprinting off the blocks, tech fell on its face. Blue-chips such as Alphabet (ticker: GOOGL, GOOG) and Amazon.com ( AMZN) are off about 3 percent, and the Technology SPDR ( XLK) exchange-traded fund of tech stocks has nearly broken even. Suddenly, the XLK's market outperformance for 2016 has been shaved awfully thin.

It's hardly technology's weakest moment of the past few years, but it does have investors of tech stocks and this top-50 fund (by assets under management) wondering: What's in store for the sector, and has XLK become dead weight?

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[See: These IPOs May Be Huge Hits in 2017.]

Worried about tech? Don't be. The tech sector's lag isn't anything to sneeze at.

From the start of the year through right before the election, the XLK had returned nearly 8 percent, outperforming eight of the other 10 SPDR Select Sector funds; utilities ( XLU) and energy ( XLE) were XLK's better. However, the XLK is one of just four sector funds to lose ground since Nov. 7.

The other three underperformers -- consumer staples ( XLP), utilities ( XLU) and real estate ( XLRE) -- are mostly suffering because of their status as yield plays. With a December rate hike all but certain, and amid headlines such as Chicago's Federal Reserve president declaring, "We are on the cusp of a period of rising interest rates," dividend stocks have received a bruising as we march toward the December Federal Open Market Committee meeting.

XLK's troubles are all its own -- and experts believe that's for the better, not the worse.

Tom Taulli, founder of OptionExercise.com and editor of the IPO Playbook at InvestorPlace.com, says tech stocks are certainly reacting to Donald Trump's election.

"There are concerns he may get tough on trade and immigration, which could make life tougher for global tech companies," he says.

But that problem has "offsetting factors" that haven't yet been fully weighed in.

"Trump is likely to repatriate capital, which will mean big slugs of cash for companies like Microsoft ( MSFT) and Apple ( AAPL), which could use this to buy back shares and raise dividends," Taulli says.

David Fabian, managing partner and chief operations officer of FMD Capital Management in Irvine, California, thinks the Trump victory might be overshadowing the bigger picture. "The tech sector has been trading in a sideways consolidation range for the past four months," he says.

It's not a new trend, in other words, and it's also nothing to fuss about.

[See: 9 Ways to Invest in a Post-Election Market.]

"This sector may simply be taking a breather after a big midsummer run higher," Fabian says. "The price action is not indicating an overly bearish tone as much as it is just coiling for the next big move."

Investors might be overlooking some value prospects, too, says Brian Nichols, president at BNLFinance.com.

Many blue-chip tech stocks were already trading at reasonable valuations despite XLK's advances, and the past month has only amplified those bargains. Nichols points out that Apple -- which makes up 13 percent of the XLK -- trades at just 10 times future earnings estimates. AT&T ( T), Verizon Communications ( VZ), Cisco Systems ( CSCO) and Intel Corp. ( INTC) are all top 10 holdings, and they trade for less than the S&P 500.

"These are large, stable businesses with high yields that are cheap," he says.

So the XLK is fine, right? The XLK is made up of the 74 tech stocks within the S&P 500. They're the bluest of blue chips, so short of a market crash, the XLK will at the very least be "fine."

After all, no sector is a larger part of the discussion of Trump's potential cash repatriation holiday than tech, with companies like Apple and Microsoft hoarding billions of dollars across international waters and boasting bulletproof balance sheets. Several XLK holdings pay decent and growing dividends -- which is why this fund, at a 1.8 percent dividend yield, somewhat surprisingly isn't all that far off from the overall S&P 500's 2 percent yield.

You can find some gripes with XLK, if you look at some of the heaviest-weighted components.

Nichols, who touted the value of several top holdings, sees Microsoft -- priced at nearly 20 times estimates -- as an overbought liability. Facebook ( FB), he says, "has already guided for decelerated growth, which could lead to a tough 2017." And he sees payment processors Visa ( V) and MasterCard ( MA) as "pricey stocks in a space that is changing rapidly." That group makes up almost 20 percent of the fund.

While Nichols believe investors should certainly own big tech, he feels they'd be better off cherry-picking attractive sector components rather than going broad-based via the XLK.

Still, the XLK has its merits.

Few sectors are as momentum-heavy as tech, meaning that a poorly timed buy in even three or four individual stocks could quickly end in ruin. The XLK -- at a meager 0.14 percent, or $14 annually on every $10,000 invested -- provides a cheap way to diversify, keeping you from making reactive moves to any one particular stock as the rest buoy the fund.

And for all the market-cap giants in the group, there's still some ludicrous growth prospects among the XLK's top members. Analysts expect nearly 35 percent revenue improvement next year on top of 52 percent this year. Then there's $530 billion Alphabet, which expects "only" 19 percent and 16 percent sales growth this year and next. And Visa, while expensive, still is poised to navigate the changing waters well, with analysts targeting double-digit climbs in sales for the next couple of years.

Yes, XLK is absurdly top-heavy, carrying 60 percent of its weight in its top 10 holdings (so, roughly 13 percent of the companies it invests in). But what doesn't get much attention is how balanced XLK's industry weights are. The fund features double-digit holdings in software, internet software and services, IT services, tech hardware storage and peripherals, semiconductors and semiconductor equipment, and diversified telecommunications services. Part of the allure of XLK's exposure to mega-cap tech is that it in effect invests in just about every major tech trend the market has to offer.

That includes major trends such as mobile, cloud computing and artificial intelligence -- the very trends that have Taulli bullish on big tech right now.

[See: The 7 Best Bank Stocks to Buy for 2017.]

And the XLK, he says, "is a relatively safe way to play."



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