Assessing Volatility In Tech Ahead Of Earnings

The technology sector, the largest sector allocation in the S&P 500, will be delivering some big-name earnings reports this week. Typically, that could mean the potential for increased volatility for exchange-traded funds tracking the sector, including the Technology Select Sector SPDR XLK.

Actually, XLK and technology have the look of value plays.

Tech As A Value Play?

In a recent note, AltaVista tagged XLK with a Neutral rating. That may sound tepid, but the research firm has Underweight ratings on a slew of the other sector SPDR ETFs, making XLK's Neutral rating look good by comparison.

The research firm said in terms of best bets for value among sector ETFs, there is XLK and the ETF's financial services and healthcare counterparts.

Based on AltaVista's 2017 estimates, XLK should carry a price-to-earnings ratio of 17.9, just under the P/E of 18 the research firm has on the S&P 500. While that does not necessarily qualify as a “deep discount,” only XLK's financial services and healthcare counterparts are less expensive. Additionally, XLK's is noticeably cheaper than its defensive consumer staples and utilities equivalents.

Ahead Of The Print

Ahead of earnings reports this week from major XLK components such as Microsoft Corporation MSFT and Google parent Alphabet Inc GOOG GOOGL, volatility in some big-name technology names is benign.

Implied options volatility in Microsoft is higher than that seen in Alphabet, Facebook Inc FB and Apple Inc. AAPL, said Rareview Macro founder Neil Azous in a note out Monday.

Still, options data suggest Microsoft's implied volatility is not out of line with what was seen in the previous eight quarters prior to earnings results. Data supplied by Azous indicates the options market is forecasting smaller-than-average post earnings moves for Alphabet, Apple and Facebook. Alphabet reports later this week and Apple reports on May 2.

Apple is by far XLK's largest holding at a weight of 15 percent. Microsoft, both classes of Alphabet shares and Facebook combine for about 30 percent of the ETF's weight.

XLK itself is not all that volatile. The big tech ETF has annualized volatility of 7.1 percent over the past three years, which is only modestly higher on than the annualized volatility seen on the NASDAQ-100 and the S&P 500 over the same period.