Tech ETFs Depend Heavily On Apple Earnings

It comes with the territory with Apple Inc. AAPL. The company is the world's largest by market value and due to the fact that the vast majority of equity-based exchange traded funds weight holdings by market value, Apple is a dominant fixture in a slew of ETFs.

Approximately 90 ETFs hold shares of Apple, but experienced investors looking for ETF proxies on Apple know they need to turn to familiar technology sector ETFs, including the Technology Select Sector SPDR XLK, iShares U.S. Technology ETF IYW and the Vanguard Information Technology ETF VGT. 

Those ETFs, with Apple weights ranging from 16.5 percent for XLK to 19.6 percent for IYW, clearly need the iPad maker's stock to perform well. Much of that needed performance comes by way of new product launches and the ensuing impact on Apple's earnings. Apple introduced a batch of new products last week, but those will not have a significant impact on third-quarter. However, the company's third-quarter earnings will still affect the aforementioned ETFs.

“For the current quarter, Apple is projected to report EPS growth of 32%. The mean EPS estimate for Apple for the calendar third quarter (fiscal fourth quarter for Apple) is $1.87, compared to year-ago EPS of $1.42,” said FactSet in a recent note. “As a result, Apple is currently expected to be the largest positive contributor to year-over-year earnings for the Information Technology sector for Q3 2015. The estimated earnings decline for the Information Technology sector is -0.4%. Excluding Apple, the sector would report a year-over-year decline in earnings of -5.9%.” 

Focus on this bit from FactSet: “The estimated earnings decline for the Information Technology sector is -0.4%. Excluding Apple, the sector would report a year-over-year decline in earnings of -5.9%.”

One way of looking at that line is that the other prominent names in ETFs like XLK IYW, including Microsoft Corp. MSFT, Facebook Inc. FB and International Business Machines Corp. IBM, are not contributing enough earnings growth to bolster tech ETFs if Apple disappoints. XLK, the largest technology ETF by assets, allocates a combined 17.2 percent of its weight to Microsoft, Facebook and IBM.

Investors betting on Apple ETFs or the stock itself are, not surprisingly, betting on the iPhone.

“What is driving Apple's substantial contribution to earnings growth for the Information Technology sector in recent quarters? The iPhone product segment has reported revenue growth in excess of 50% in the previous three quarters, and is projected to report revenue growth of 31% in Q3 2015,” according to FactSet.