XNTK - XNTK: This ETF May Not Have Enough Technology For Its Own Good

2023-03-23 10:23:37 ET

Summary

• XNTK invests primarily in technology stocks with also sizable allocations to consumer cyclicals.
• Technology continues to gain popularity amid new innovations and rallies surrounding artificial intelligence, possibly positioning this ETF for profits.
• Consumer cyclical stocks could have a rough year ahead compared to technology, potentially dragging XNTK down below the market and its peers alike.

I rate the SPDR NYSE Technology ETF ( XNTK ) a sell because when placed against its alternatives, it simply has fewer advantages and possibly not enough going for it. Alternatively, this ETF could still see enhanced performance from the ongoing innovations in the tech industry centered on artificial intelligence, cloud computing, and cybersecurity. However, this ETF may have more non-technology holdings for its own good. I believe this could have dragged this ETF below its peers and could also contribute to underperformance in the future.

From the lens of a technology investor, XNTK might not exactly provide what’s scripted. By this I’m referring to the fact that this ETF allocates more than a quarter outside of technology. Though diversification is not an inherently bad quality, it makes this ETF less sector-specific. I believe this defeats some of the overall purpose. Additionally, non-technology allocations are mainly in consumer cyclicals , which often struggle amid tough economic conditions like the ones we’re currently in.

XNTK still has room for profit given the technology sector’s strong growth forecast as well as the possibility of medium-term economic recovery. However, investors could just as easily invest in a technology ETF that might give them more of what they’re looking for, making this ETF inferior in several respects. Potential alternatives include the Technology Select Sector SPDR ETF ( XLK ) and the Invesco Exchange-Traded Fund Trust - Invesco S&P 500 Equal Weight Technology ETF ( RYT ).

Strategy

XNTK tracks the NYSE Technology TR USD Index while using a representative sampling technique. This could serve to provide investors with the most important holdings within the designated index. Furthermore, the same investors might also be spared of possible confusion stemming from having to track more securities than necessary. This ETF invests in both value and growth stocks of varying market capitalizations.

Holdings Analysis

XNTK invests primarily in technology and consumer cyclical stocks exclusively within the United States. Allocations are weighted heaviest towards technology, sparing just over a quarter to consumer cyclical and communication combined.

This ETF allocates 34% to the top 10 holdings and 76% to the top 25 in an ETF of 36 stocks, making XNTK not top-heavy and overall equally-weighted. Individual holdings are quite dispersed, with no more than 5% allocated toward a single company.

Strengths

Newer phenomena like cloud computing and cybersecurity that are becoming increasingly integrated in business and everyday life, depend heavily on technological infrastructure. Such infrastructure includes but is not limited to the latest software as well as hardware systems like semiconductors. Cloud computing and cybersecurity gaining more traction in the long term could Increase the demand for these assets and ultimately drive the profits of companies held in XNTK.

This ETF’s equally-weighted allocations and their implication in reducing concentration risk may make this ETF more attractive to those that aren’t as willing to hedge on the performance of several large corporations.

Weaknesses

This ETF has historically performed quite poorly against its potential alternatives. Investors could easily pick XLK or RYT for their similarities and apparent edges over this XNTK, possibly putting this ETF at a significant disadvantage.

XNTK has also underperformed against the broader market in the past year.

I believe this underperformance in the past year could be attributable to this ETF’s consumer cyclical holdings. During periods of elevated costs, consumers might gravitate away from non-essential services and luxuries, and more towards necessities. This could evidently hurt the earnings consumer cyclicals are often focused on luxuries in the domains of retail, automotives, and travel. The graph below depicts the underperformance of the Invesco Exchange-Traded Fund Trust - Invesco DWA Consumer Cyclicals Momentum ETF ( PEZ ) against the rest of the market during the past year.

Opportunities

XNTK could profit from emerging trends like artificial intelligence , who’s increasing acknowledgement and use by society is currently fueling its growth . Particularly in regards to generative AI, this systems’ rapid expansion within the next few years could drive up the demand for infrastructure provided by companies held in XNTK.

The recent collapse of several banks is speculated by some to be a result of systemic issues primarily attributable to subpar productivity within banks. In general, reduced productivity in banks may be associated with poor resource and risk management as well as incautious lending. Artificial Intelligence is renowned partially for its ability to enhance productivity . Therefore, recent crises could drive up profits of industrial technology and B2B companies that integrate AI.

Threats

The ongoing semiconductor shortage remains a threat to the demand of these chips as well as the profits of the companies that produce them. XNTK holds many semiconductor companies, meaning that the shortage persisting for long enough could eventually cut into investors’ returns.

The United States also recently imposed new regulations on the CHIPS for America Incentives Program regarding investments in projects located in certain non-United States countries. Two of the main countries of consideration were China and Russia. Recipients were therefore advised not to use funding to invest in semiconductor expansion movements directed towards these countries. The same recipients are also prohibited from partaking in collaborative research and technology licensing endeavors.

The primary motivation behind this was to ensure that other countries do not pull ahead in developing such technology that could be used against the United States. Though this could serve to enhance the United States’ safety, China remains a significant producer of semiconductors. Therefore, these limitations could inhibit potentially profitable and diversifying collaborations as well as create geopolitical tensions.

This recent event could alternatively give the United States an edge in semiconductor expansion, making it a potential opportunity as well. How one perceives it is subjective and dependent on speculation.

Conclusions

ETF Quality Opinion

XNTK could be a quality choice for those interested in technology but not willing to depend completely on the sector's performance. Therefore, this ETF’s sizable allocations to both technology and consumer cyclicals could better expose investors to any overlap between the two sectors. However, diversification could separate XNTK from peers in a negative manner, as it could drag down returns amid high inflation.

ETF Investment Opinion

I rate XNTK a sell as this ETF could have trouble outperforming both its peers and the broader market in the coming periods. The price is also not notably low, indicating a potentially effective selling opportunity. Ultimately, I believe investors could potentially profit more in the medium to- long term by investing in alternatives like XLK and RYT.

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