Fidelity ETF FTEC: Technology Dashboard For April

This monthly article series shows a dashboard with aggregate industry metrics in technology and communication services. It may also serve as a top-down analysis of technology ETFs like the Fidelity MSCI Information Technology Index ETF (NYSEARCA:FTEC), whose largest holdings are used to calculate these metrics.

Shortcut

The next two paragraphs in italic describe the dashboard methodology. They are necessary for new readers to understand the metrics. If you are used to this series or if you are short of time, you can skip them and go to the charts.

Base Metrics

I calculate the median value of five fundamental ratios for each industry: Earnings Yield (“EY”), Sales Yield (“SY”), Free Cash Flow Yield (“FY”), Return on Equity (“ROE”), Gross Margin (“GM”). The reference universe includes large companies in the U.S. stock market. The five base metrics are calculated on trailing 12 months. For all of them, higher is better. EY, SY and FY are medians of the inverse of Price/Earnings, Price/Sales and Price/Free Cash Flow. They are better for statistical studies than price-to-something ratios, which are unusable or non available when the “something” is close to zero or negative (for example, companies with negative earnings). I also look at two momentum metrics for each group: the median monthly return (RetM) and the median annual return (RetY).

I prefer medians to averages because a median splits a set in a good half and a bad half. A capital-weighted average is skewed by extreme values and the largest companies. My metrics are designed for stock-picking rather than index investing.

Value and Quality Scores

I calculate historical baselines for all metrics. They are noted respectively EYh, SYh, FYh, ROEh, GMh, and they are calculated as the averages on a look-back period of 11 years. For example, the value of EYh for hardware in the table below is the 11-year average of the median Earnings Yield in hardware companies.

The Value Score (“VS”) is defined as the average difference in % between the three valuation ratios (EY, SY, FY) and their baselines (EYh, SYh, FYh). The same way, the Quality Score (“QS”) is the average difference between the two quality ratios (ROE, GM) and their baselines (ROEh, GMh).

The scores are in percentage points. VS may be interpreted as the percentage of undervaluation or overvaluation relative to the baseline (positive is good, negative is bad). This interpretation must be taken with caution: the baseline is an arbitrary reference, not a supposed fair value. The formula assumes that the three valuation metrics are of equal importance.

Current data

The next table shows the metrics and scores as of last week’s closing. Columns stand for all the data named and defined above.

	VS	QS	EY	SY	FY	ROE	GM	EYh	SYh	FYh	ROEh	GMh	RetM	RetY
Hardware	85.52	73.69	0.0644	1.5853	0.0782	18.25	38.03	0.0347	0.8961	0.0403	7.11	41.87	-8.01%	-5.29%
Comm. Equip.	-30.39	26.70	0.0295	0.1387	0.0274	23.04	63.67	0.0314	0.2839	0.0415	15.00	63.80	-6.69%	2.82%
Entertainment	-17.49	-9.24	0.0327	0.4433	0.0319	12.50	49.41	0.0503	0.4383	0.0392	17.31	45.20	-3.82%	-16.82%
Electronic Equip.	-23.71	43.12	0.0401	0.3628	0.0378	20.45	43.61	0.0438	0.8425	0.0401	12.64	35.05	-9.16%	-11.56%
Software	-22.56	9.51	0.0232	0.1238	0.0303	21.16	83.86	0.0276	0.1790	0.0383	17.40	86.12	-1.46%	-15.36%
Telecom	-42.22	6.74	0.0639	0.5954	-0.0145	13.65	57.86	0.0490	0.6489	0.0297	11.88	58.74	4.99%	-0.44%
Semiconductors	-9.75	19.40	0.0524	0.1962	0.0300	32.09	62.67	0.0470	0.2538	0.0366	23.26	62.15	-13.79%	-9.01%
IT Services	-27.12	3.09	0.0311	0.2187	0.0252	26.95	54.42	0.0393	0.3403	0.0335	24.82	55.75	0.72%	4.39%

Value And Quality chart

The next chart plots the Value and Quality Scores by industry (higher is better).

Evolution since last month

The most notable moves in value scores are an improvement in hardware and telecommunication, and a deterioration in IT services. Telecom has also improved in quality.

Momentum

The next chart plots momentum data.

Interpretation

Hardware is the most attractive technology industry regarding my metrics. It is far above the baseline in both value and quality scores based on 11-year averages. Semiconductors are overvalued by about 10%, but a good quality score may justify it. Other industries are overvalued by 17% to 42% relative to historical averages. Good quality scores may partly justify it for electronic equipment, and to a lesser extent in communication equipment. Telecommunication is the most overvalued industry and entertainment has both value and quality scores in negative territory.

Focus on FTEC

The Fidelity MSCI Information Technology Index ETF has been tracking the MSCI USA IMI Information Technology 25/50 Index since 10/21/2013. It has a total expense ratio of 0.08%, which is a bit cheaper than other passive index ETFs in the same sector like XLK (0.12%) and VGT (0.10%). As of writing, the fund holds 364 stocks. The next table shows the top 10 holdings with valuation and growth metrics. Their aggregate weight is over 60%. The top two holdings (Apple Inc and Microsoft Corp) weigh 40.5% together, which represents a high exposure to risk related to these companies.

Ticker	Name	Weight%	EPS growth %TTM	P/E TTM	P/E fwd	Yield%
AAPL	Apple Inc.	22.78	62.83	27.41	26.89	0.53
MSFT	Microsoft Corp.	17.73	39.98	29.85	30.01	0.88
NVDA	NVIDIA Corporation	5.44	122.95	56.66	38.52	0.07
V	Visa Inc.	3.03	26.04	36.13	29.98	0.70
MA	Mastercard Inc.	2.55	37.46	40.72	35.01	0.55
AVGO	Broadcom Inc.	2.1	103.86	33.43	16.49	2.80
CSCO	Cisco Systems Inc.	1.91	17.03	18.29	14.83	2.97
ADBE	Adobe Inc.	1.76	-12.37	42.23	31.18	0
ACN	Accenture plc	1.73	17.43	31.61	29.06	1.24
CRM	Salesforce Inc.	1.69	-65.81	124.57	40.12	0

Data calculated with Portfolio123

Since inception in October 2013, FTEC and XLK have identical annualized returns. XLK is a bit less volatile, but the difference is insignificant.

	Total Return	Annual. Return	Drawdown	Sharpe	Volatility
FTEC	395.99%	20.80%	-31.48%	1.2	17.61%
XLK	396.03%	20.80%	-30.72%	1.24	16.87%

FTEC is a fund with cheap fees for investors seeking a capital-weighted exposure in technology. It holds much more stocks than XLK (currently 364 vs. 77), but past performance is the same: tail holdings have a low aggregate weight relative to S&P 500 tech companies. Investors willing to keep a position in technology for the long-term may indifferently choose FTEC or XLK. Liquidity makes XLK a better choice for tactical allocation and trading. For those who want to avoid overweighting Apple and Microsoft, the Invesco S&P 500 Equal Weight Technology ETF (RYT) may be a better choice.

Dashboard List

I use the first table to calculate value and quality scores. It may also be used in a stock-picking process to check how companies stand among their peers. For example, the EY column tells us that a hardware company with an earnings yield above 0.0644 (or price/earnings below 15.52) is in the better half of the industry regarding this metric. A Dashboard List is sent every month to Quantitative Risk & Value subscribers with the most profitable companies standing in the better half among their peers regarding the three valuation metrics at the same time. The list below was sent to subscribers several weeks ago based on data available at this time.

KLIC	Kulicke and Soffa Industries Inc.
THRY	Thryv Holdings Inc.
TDC	Teradata Corporation
ZD	Ziff Davis Inc.
SWKS	Skyworks Solutions Inc.
IT	Gartner Inc.
CTXS	Citrix Systems Inc.
IBM	International Business Machines Corp.

It is a rotating list with a statistical bias toward excess returns on the long-term, not the result of an analysis of each stock.