Apple And ETFs: Questions And Answers

It feels like it has been ages since we discussed the impact of some company from California called Apple AAPL and the stock's impact on exchange traded funds. Well, when the financial blogosphere cannot go two minutes without mentioning a stock that is flirting with $600 and is by far home to the largest market value in the U.S., it's high time to talk about that stock and what it means in the world of ETFs. Fortunately, we've been getting a lot requests to address Apple and ETFs, so let's open the ETF Professor's mailbag. Dear Professor, Every night at dinner for the past two months, you've complained about how the only ETFs most of the pros talk about when it comes to Apple are the PowerShares QQQ QQQ and the Technology Select Sector SPDR XLK. Why does this bother you so much? Those ETFs have big weights to Apple. Love, The Future Mrs. Professor Dear Mrs. Professor, Thanks so much for writing in. I'm glad I finally wore you down to this point. Anyway, what really grinds my gears about QQQ and XLK getting the bulk of the Apple ETF attention is simple: Those funds do NOT have the largest weights to Apple. One example of an ETF with a larger Apple allocation mentioned here before is the iShares Dow Jones US Technology Index Fund IYW. IYW is a big ETF, almost $1.7 billion in assets big, and Apple accounts for almost 21.2% of the ETF's weight, but IYW hardly gets mentioned. Dear Professor, You recently took issue with someone that basically said stocks are better than ETFs. Is there anyway you can illustrate just how profound the impact is of Apple's meteoric rise on ETFs? Sincerely, Hearts For ETFs Dear Hearts, So glad to hear you love ETFs and yes, I can tell you that Apple's performance and the ensuing impact on ETFs runs deep. To keep things simple, I'll stick with the three ETFs I've already mentioned: IYW, QQQ and XLK. In the past five years, Apple is up over 500%. Over the same time, XLK is up a tad over 31%. QQQ is up less than 60% while IYW is up about 45%. There are two sides to this argument. Naysayers can say "Gee, Apple hasn't really done much at all for those ETFs." On the other hand, if Apple didn't exist, that trio (and perhaps more ETFs) would probably be down over the past five years, right? Dear Professor, In mid-February, you mentioned there were some unleveraged ETFs that were outperforming Apple to start 2012. What's the status of those funds today and there are any other unleveraged ETFs doing better than Apple year-to-date? Thanks, Curious in Cupertino Dear Curious, Funny you should ask because I was recently wondering the answer to those questions myself. Apple is up over 41% year-to-date heading into Friday's trading day and almost all of the ETFs that meet or beat that number are leveraged funds. That said data from Yahoo Finance show the Market Vectors India Small Cap ETF SCIF has outpaced Apple this year while the EGShares India Small Cap ETF SCIN and the Market Vectors Vietnam ETF VNM aren't too far behind. Dear Professor, Can demand for Apple's stock really impact the price of an ETF? Seems like a bunch of rubbish to me. Prove me wrong. Truly, Doubting Thomas Dear Tom, I get where you're coming from and maybe you've spent too much time listening to folks blame ETFs for everything from global warming to the 2010 flash crash. The reality is the price of plain vanilla long ETFs like XLK or the Vanguard Growth ETF VUG, which offers exposure to Apple, is driven by demand for its underlying components. Said differently, ETFs track the prices of their holdings, meaning Apple isn't following XLK. Rather, XLK is responding to Apple. Obviously, the ETF's weight to Apple makes a difference. The larger the ETF's exposure to Apple and the more intense the accumulation or distribution is in the stock, the more sensitive the ETF will be to Apple's gyrations. Dear Professor, I hear the Nasdaq-100 might rebalance to feature a larger weight to Apple. Shouldn't I just buy QQQ, wait for this to happen and use the proceeds to fund my retirement? In Anticipation, Eager Beaver Dear Eager, Maybe buy QQQ and convince yourself it's just your way of getting Apple exposure? Using recent history as our guide, Nasdaq announced a rebalancing almost a year ago that saw Apple's weight in the Nasdaq 100 pared. The announcement arrived on April 5, 2011 with Apple trading around $338. Ten weeks later, the stock had slid to $323, but by late July it was over $400. Obviously if Apple's weight in the Nasdaq 100 is increased, index fund managers will be forced to buy more shares of the stock to properly track the index. That's my way of saying buy QQQ before the rebalancing, if it even happens.