FTEC: Technology Dashboard for November (NYSEARCA:FTEC)

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jiefeng jiang

This monthly article series showcases a dashboard with aggregated industry metrics across technology and communications services. It can also serve as a top-down analysis of technology ETFs such as the Fidelity MSCI Information Technology Index ETF (NYSEARCHA:FTEC), whose largest holdings are used to calculate these metrics.

Shortcut

The next two paragraphs in italics describe the dashboard methodology. They are necessary for new readers to understand the metrics. If you are used to these series or if you are short on time, you can skip them and move on to the leaderboards.

Basic metrics

I calculate the median of five key ratios for each industry: Earnings Yield (“EY”), Sales Yield (“SY”), Free Cash Flow Yield (“FY”), Return on Equity (“ROE”), Gross Margin ( “GM”). The reference universe includes the large companies of the US equity market. The five basic metrics are calculated over the last 12 months. For all of them, higher is better. EY, SY and FY are medians of the inverse of price/earnings, price/sales and price/free cash flow. They are better for statistical studies than price-something ratios, which are unusable or unavailable when the “something” is close to zero or negative (for example, companies with negative earnings). I also look at two momentum metrics for each group: the median monthly return (RetM) and the median annual return (RetY).

I prefer medians to averages because a median divides a set into a good half and a bad half. A capital-weighted average is biased by extreme values ​​and the largest companies. My metrics are designed for stock selection rather than index investing.

Value and quality scores

Calculate historical baselines for all metrics. EYh, SYh, FYh, ROEh, GMh are indicated respectively and are calculated as averages over a reference period of 11 years. For example, the EYh value for hardware in the following table is the 11-year average of the average earnings return for hardware companies.

The Value Score (“VS”) is defined as the average difference in % between the three valuation ratios (EY, SY, FY) and their baselines (EYh, SYh, FYh). Similarly, the Quality Score (“QS”) is the mean difference between the two quality reports (ROE, GM) and their baselines (ROEh, GMh).

Scores are in percentage points. VS can be interpreted as the percentage undervalued or overvalued relative to the baseline (positive is good, negative is bad). This interpretation must be taken with caution: the baseline is an arbitrary reference, not an assumed fair value. The formula assumes that the three evaluation metrics are of equal importance.

Current data

The next table shows the metrics and scores as of last week’s close. The columns represent all the data named and defined above.

VERSUS

DS

EY

YES

FY

ROE

GM

Hey

YES

FYh

ROEh

GMh

RetM

RetY

Hardware

26.85

-0.51

0.0649

1.3399

0.0238

7.81

38.69

0.0363

0.9351

0.0407

7.35

41.77

16.76%

-15.32%

comm. Equip.

-36.84

3.74

0.0285

0.1837

0.0135

18.97

55.21

0.0314

0.2785

0.0412

15.70

63.72

12.23%

-2.68%

Fun

-29.31

-35.01

0.0138

0.6452

0.0146

6.42

41.99

0.0492

0.4428

0.0381

17.20

45.32

10.03%

-31.16%

Electronic equipment.

-25.57

20.05

0.0396

0.5996

0.0231

17.04

38.68

0.0433

0.8108

0.0399

12.96

35.61

16.48%

-11.59%

Software

-28.88

-2.59

0.0209

0.1192

0.0252

17.45

82.84

0.0270

0.1743

0.0373

17.71

86.05

8.45%

-45.51%

Telecom

-21.40

-8.67

0.0358

0.8425

0.0095

10.06

57.14

0.0502

0.6516

0.0270

11.81

58.61

11.23%

-34.08%

Semiconductors

-0.36

20.73

0.0557

0.2228

0.0320

33.34

62.67

0.0467

0.2482

0.0356

23.69

62.22

24.89%

-26.71%

IT services

-24.75

9.81

0.0344

0.2182

0.0235

04.33

50.26

0.0387

0.3313

0.0331

25.61

55.48

5.00%

-24.40%

Value and quality chart

The next graph plots value and quality scores by industry (the higher the better).

Value and quality in technology

Value and quality in technology (Graphic: author; data: Portfolio123)

Evolution from last month

Value and quality scores have dropped dramatically in hardware and telecommunications.

Variations in value and quality

Variations in value and quality (Graphic: author; data: Portfolio123)

Momentum

The next chart plots momentum data.

Momentum in technology

Momentum in technology (Graphic: author; data: Portfolio123)

Interpretation

The hardware is undervalued by about 27% compared to 11-year averages and is close to its quality baseline. Semiconductors are close to the baseline in terms of value and above it in terms of quality. Other industries are overvalued by 21% to 37% by the same metrics. Good quality scores can partly justify overestimating IT services and electronic equipment.

Focus on FTEC

The Fidelity MSCI Information Technology Index ETF tracks the MSCI USA IMI Information Technology 25/50 Index since 21/10/2013. It has a total expense ratio of 0.08%, which is slightly cheaper than other passive index ETFs in the same sector such as Communication Services Select Sector SPDR Fund (XLK) and Vanguard Information Technology ETF (VGT) (0.10%) . At the time of writing, the fund holds 381 shares. The next table shows the top 10 holdings with baseline valuation and growth metrics. Their overall weight is 59.1%. The two largest holdings (Apple Inc and Microsoft Corp) together weigh 40.2%, which represents a high exposure to the risks associated with these companies.

Tickers

First name

Weight%

%TTM EPS growth

P/E TTM

P/E ahead

Product%

AAPL extension

The Apple company.

23.25

8.83

24.59

24.09

0.61

MSFT extension

Microsoft Corp.

16.95

3.73

26.07

25.43

1.12

v

Visa, Inc.

3.52

25.45

30.50

25.29

0.86

NVDA extension

Nvidia Corp.

3.48

8.85

54.66

49.86

0.10

BUT

Mastercard, Inc.

2.93

23.12

34.31

32.59

0.57

AVGO

Broadcom, Inc.

1.97

70.17

22.85

13.97

3.13

CSCO extension

cisco systems, inc.

1.94

12.84

15.92

12.74

3.39

AC extension

Accenture SpA

1.85

17.01

27.32

25.65

1.53

CRM

Salesforce, Inc.

1.67

-78.58

302.93

34.22

0

ADBE

adobe, inc.

1.55

-16.14

10.34

25.39

0

Data calculated with Portfolio123.

Since inception in October 2013, FTEC has slightly underperformed XLK, but the difference in annualized return and risk metrics is insignificant.

Total return

Annual. Return

Withdrawal

sharp

Volatility

FTEC extension

345.96%

17.96%

-36.82%

0.91

19.00%

XLK

352.73%

18.16%

-35.48%

0.94

18.32%

FTEC is an affordable fee fund for investors seeking capital-weighted exposure to technology. It holds significantly more shares than XLK (currently 381 vs. 78), but past performance is very close to it. Investors willing to hold a position in the technology for the long term can choose either FTEC or XLK. Liquidity makes XLK a better choice for tactical allocation and trading. For those who want to limit their exposure to Apple and Microsoft, the Invesco S&P 500 Equal Weight Technology (RYT) ETF is a better choice.

Dashboard list

I use the first table to calculate value and quality scores. It can also be used in a stock selection process to test how companies rank among their peers. For example, the EY column tells us that a hardware company with an earnings yield above 0.0649 (or price/earnings below 15.41) is in the top half of the industry on this metric. A Dashboard List is sent to Quantitative Risk & Value subscribers each month featuring the most profitable companies that are in the better half among their peers across the three valuation metrics at the same time. The list below was sent to subscribers several weeks ago based on the data available at this time.

AOS extension

Alpha & Omega Semiconductor Ltd.

KLIC

Kulicke & Soffa Industries, Inc.

THRY

Thryv Holdings, Inc.

ZD

Ziff Davis, Inc.

SWKS extension

Skyworks Solutions, Inc.

DIOD

Diodes, Inc.

This is a rolling list with a statistical bias towards long-term excess returns, not the result of an analysis of each stock.

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