The Technology Select Sector SPDR ETF (XLK) may indeed follow the technology sector of the Standard & Poor’s 500 stock index.
But don’t expect much in the way of diversification from the ETF.
The latest figures on Yahoo Finance show that 19.55% of the ETF’s assets are invested in shares of Microsoft (MSFTWealth Strength IndexAAPL is Extremely Up and trending Up.) Another 17.52% are invested in Apple (AAPLWealth Strength IndexAAPL is Extremely Up and trending Up).
After that the ETF’s holdings drop all the way to a 5.47% stake in Visa (V).
That’s 37% in the ETF’s top two stocks. And therefore 63% in the rest of the sector.
There are consequences to that degree of concentration for the sector and the market. I’m pretty sure I haven’t thought of them all.
If Microsoft beats earnings expectation when it reports on October 23, a week from today, it will light a rocket under tech stocks in general and Apple in particular (ahead of that company’s October 30 earnings report.) The odds are pretty good that Microsoft will announce an earnings beat since Wall Street is looking for just $1.25 a share in earnings for the quarter, relatively minor increase from the $1.14 in earnings in the September quarter of 2018.
With that boost from Microsoft, I’d expect the stocks in the technology sector with any connection to Microsoft or Apple to move up in anticipation of a beat from Apple on October 30.
That could create a fairly impressive bit of momentum into November.
On the other hand, a miss from Microsoft could be enough to raise doubts about every stock in the sector. And a failure by Apple to confirm reports of a big increase in sales performance for the iPhone 11 would be enough to strengthen those doubts and sink the sector no matter what other stocks in technology are reporting.
In an era of passive index investing and computerized trading I wouldn’t underestimate the power of just two very big market cap stocks to create trading momentum in the entire sector. And what do you do if the technology index goes up? You buy the index.