While S&P Capital IQ consensus forecasts for second quarter 2015 EPS has declined sharply since the beginning of 2015, we think that the information technology sector should be one of the bright spots. Meanwhile, the sector is trading at a discounted P/E multiple. We believe investors can gain exposure to a number of favorable trends in the broader sector through diversified technology focused ETFs.
As my colleague Lindsey Bell has noted in the past, earnings forecasts have been falling for all S&P 500 index sectors. On January 2, analysts expected second quarter 2015 S&P 500 earnings would increase 4.2% from the prior year. However, driven in part by weakness in the energy and consumer staples sectors, the S&P 500 forecast is now for a 4.2% decrease as of June 16. While forecasts for the tech sector have fallen as well, analysts now project 2.4% growth. For all of 2015, consensus forecasts call for 4.6% growth, ahead of the S&P 500’s 0.5% gain. However, the S&P 500 Tech sector trades at a 2015 P/E of 16.8X, below that of the S&P 500’s 17.7 multiple.
Angelo Zino, an equity analyst at S&P Capital IQ, believes there are number of catalysts that should support sector growth. Within hardware and storage, he expects double-digit smartphone growth in 2015 and 2016 to be augmented by tripling in wearables, albeit off a smaller base. He adds that data centers usage for cloud adoption is providing robust growth prospects to offset traditional storage.
Meanwhile, Zino expects that semiconductor fundamentals will experience a stronger second half of 2015 as PC inventory builds and Chinese demand for smartphones and mobile infrastructure increases. In addition, while there has been recent merger announcements, but he thinks there will be further consolidation.
During the first five months of 2015, investors put approximately $300 million into technology sector ETFs, in contrast to other sectors such as financials and utilities that experienced outflows.
Technology Select Sector SPDR has $13 billion in assets and has a weighted average market capitalization of $252 billion. Tech hardware, storage & peripherals (22% of assets) is the largest industry, while semiconductor and semiconductor equipment (11%) companies are also well represented. XLK has a 0.15% expense ratio and trades with a $0.01 bid/ask spread.
Vanguard Information Technology has $7.7 billion in assets, but due to its inclusion of some small- and mid-cap has a weighted average market capitalization of $225 billion. Tech hardware, storage & peripherals (21% of assets) is also the largest industry, but semiconductor and semiconductor equipment (13%) companies are more represented. While VGT has a lower 0.12% expense ratio, it trades with a wider $0.05 bid/ask spread.