Time For Tech ETFs Ahead Of Higher Interest Rates

The Technology Select Sector SPDR XLK, the largest exchange traded fund tracking the largest sector weight in the S&P 500, is off nearly two percent over the past month. With the Federal Reserve inching closer to raising interest rates, investors should not shun XLK and rival technology ETFs. Actually, it could be time to talk tech with sector ETFs.

As a cyclical sector, technology also provide investors with protection and profit potential if and when the Federal Reserve gets around to increasing borrowing costs. Technology is a cyclical sector, so its durability against a backdrop of rising rates is not surprising; higher rates should signal the Fed's confidence in the sturdiness of the U.S. economy.

Data suggest investors are embracing XLK even in the wake of a 5.6 percent one-month decline by shares of Apple Inc. AAPL, the ETF's largest holding. Last month, short interest in XLK dwindled to seven percent, the lowest total among the nine sector SPDR ETFs, however, XLK's shares outstanding tally increased five percent, according to AltaVista data.

The research firm has a neutral rating on XLK, which implies average appreciation potential.

“This indicates that valuations adequately reflect the fundamentals of stocks in these funds. The majority of funds we cover fall into this category,” said AltaVista in a note.

Up 6.6 percent year-to-date, good for a middling performance among the nine established SPDR ETFs, XLK has been bolstered by market-beating performances by Facebook Inc. FB and Dow component Microsoft Corp. MSFT, among others. Those are two of XLK's largest holdings after Apple. XLK's 75 holdings have a weighted average market value of $285.4 billion.

With the technology sector trading inline on valuation with the S&P 500 or just below the benchmark U.S. equity index, there is some value here. That is especially true when considering compound annual growth rate for XLK components' earnings of 10.3 percent since 2010, according to AltaVista.

“Tech seems to have become a new Value sector. Growth has slowed, but long-term growth forecasts still far exceed those for the S&P 500 while margins & ROE remain impressively high. Meanwhile the sector trades at a P/E discount to the S&P500 whereas historically it has enjoyed a premium. As a result we think Tech appears relatively attractive at these levels,” adds the research firm.