Fidelity FTEC ETF: June Technology Dashboard

Fidelity FTEC ETF: June Technology Dashboard

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This monthly series of articles showcases an industry-standard dashboard aggregated in technology and communications services. It may also be a downward analysis of technology ETFs such as the Fidelity MSCI Information Technology Index ETF (NYSEARCA: FTEC), whose largest holdings are used to calculate these metrics.

abbreviation

The following two paragraphs describe in italics the dashboard methodology. They are essential for new readers to understand metrics. If you are familiar with this series or if you are short on time, you can skip it and go to the charts.

Basic metrics

Calculate the average value of five basic ratios for each industry: return on earnings (“EY”), return on sales (“SY”), return on free cash flow (“fiscal year”), return on equity (“ROE”), gross margin (“ GM”). The reference universe includes the large companies in the US stock market. The five primary metrics are calculated for the last 12 months. For them all, higher is better. EY, SY, and FY are averages to reflect price/earnings, price/sales, and price/free cash flow. They are better for statistical studies of price-to-thing ratios, which are unusable or unavailable when the ‘thing’ is close to zero or negative (for example, companies with negative earnings). Also look at two measures of momentum for each group: average monthly return (RetM) and average annual return (RetY).

I prefer averages over averages because the median divides a group into half good and half bad. The capital-weighted average skews away from the outliers and the larger firms. My metrics are designed for stock picking rather than index investing.

Quality and Quality Score

Calculate historical baselines for all metrics. They are written down respectively as EYh, SYh, FYh, ROEh, and GMh, and are calculated as the averages of an 11-year review period. For example, the hardware EYh value in the table below is the 11-year average of the hardware company’s earnings yield.

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

The results are in percentage points. VS can be interpreted as the percentage of undervaluation or overvaluation relative to baseline (positive is good, negative is bad). This interpretation should be taken with caution: the baseline is an arbitrary reference, not an assumed fair value. The formula assumes that the three rating scales are equally important.

current data

The following table shows metrics and results as of last week’s close. The columns represent all the data named and specified above.

against

QS

EY

bad

fiscal year

ROE

GM

Verse

seh

FYh

ROEh

GMH

Ret

re

hardware

72.61

56.78

0.0720

1.4339

0.0627

15.77

39.76

0.0351

0.9082

0.0405

7.22

41.83

-7.12%

-2.61%

Comm processing.

-13.27

29.96

0.0360

0.1789

0.0342

24.53

63.01

0.0315

0.2818

0.0415

15.22

63.81

-1.08%

-14.78%

entertainment

-7.24

-17.05

0.0284

0.6313

0.0302

10.48

47.66

0.0502

0.4382

0.0389

17.31

45.23

-8.57%

-33.24%

electronic equipment.

-28.84

32.20

0.0464

0.4493

0.0213

18.77

41.43

0.0437

0.8311

0.0400

12.78

35.25

-5.53%

-11.74%

Programming

-9.98

11.93

0.0278

0.1523

0.0316

22.19

83.80

0.0275

0.1775

0.0380

17.54

86.10

-2.57%

-36.02%

Telecom

11.23

2.98

0.0802

0.6812

0.0190

12.80

57.46

0.0493

0.6485

0.0288

11.85

58.70

-5.74%

-19.11%

Semiconductors

6.48

13.27

0.0605

0.2351

0.0351

29.37

62.75

0.0469

0.2515

0.0362

23.38

62.18

-7.86%

-14.69%

IT Services

-15.55

8.10

0.0413

0.2381

0.0256

29.65

54.42

0.0390

0.3373

0.0333

25.03

55.68

-3.22%

-14.92%

Value and Quality Chart

The following chart plots the value and quality points by industry (higher is better).

Value and quality in technology

Value and quality in technology (graph: author; data: Portfolio123)

Evolution since last month

Due to price movement, the degree of value has improved in all technology and communication industries except for electronic equipment.

Differences in value and quality

Differences in value and quality (graph: author; data: Portfolio123)

Paid

The following chart plots the momentum data.

Momentum in technology

Momentum in technology (graph: author; data: Portfolio123)

Translation

Devices are undervalued compared to the 11-year average. It has the best value and quality scores among all the technology and communications industries. Communications and semiconductors are undervalued and the quality is above the historical baseline. Other industries are overestimated by 7% to 29% compared to historical averages. Good quality metrics may partly justify this except for entertainment, whose value and quality scores fall into negative territory.

Focus on FTEC

The Fidelity MSCI Information Technology Index ETF has been tracking the MSCI USA IMI Information Technology 25/50 since 10/21/2013. Its total expense ratio is 0.08%, which is slightly cheaper than other passive ETFs in the same sector such as XLK (0.12%) and VGT (0.10%). As of this writing, the fund owns 363 shares. The following table shows the top 10 holdings with baseline valuation and growth metrics. Gross weight 59.39%. The two largest holdings (Apple Inc and Microsoft Corp) weigh 39.55% together.

ribbon

Noun

Weight%

EPS %TTTM نمو growth

P/E TTM

P/E fwd

fruit%

AAPL

Apple company

21.60%

38.05

22.09

22.14

0.68

MSFT

Microsoft Corporation

17.95%

30.44

26.47

27.32

0.98

NVDA

NVIDIA Corporation

4.32%

76.41

44.46

30.34

0.10

Fifth

Visa company

3.33%

32.53

31.25

27.15

0.77

Master’s

MasterCard Corporation

2.93%

47.21

33.02

30.10

0.62

AVGO

Broadcom Corporation

2.22%

87.85

24.97

13.59

3.26

ADBE

Adobe Inc

1.84%

-11.30

35.43

26.80

0.00

CSCO

Cisco Systems, Inc

1.77%

18.23

15.49

13.17

3.44

ACN

Accenture plc

1.76%

17.43

28.50

26.18

1.37

INTC

Intel Corp

1.68%

35.14

6.27

10.97

3.87

Calculated data using Portfolio123

Since its inception in October 2013, FTEC has performed slightly below that of XLK, but the difference in annualized return and risk metrics is insignificant (see the following table).

full back

annual. Back

backing down

mustache

volatility

FTEC

323.07%

18.11%

-32.15%

1.06

18.04%

XLK

333.57%

18.45%

-30.72%

1.1

17.23%

FTEC is a low-fee fund for investors seeking weighted exposure to technology capital. It has more stock than the XLK (currently 363 versus 79), but past performance is pretty close: Tail holdings have a lower gross weight compared to the tech S&P 500. Long-term investors may choose FTEC or XLK indifferently. Liquidity makes XLK a better choice for tactical customization and trading. If Apple and Microsoft’s weight gain is a concern, the Invesco S&P 500 Equal Weight Technology ETF (RYT) may be a better option.

dashboard menu

I use the first table to calculate the Quality and Value Score. It can also be used in the stock picking process to check the standing of companies among their peers. For example, the EY column tells us that a hardware company with revenue greater than 0.0720 (or price/earnings less than 13.89) is in the better half of the industry with respect to this metric. Every month a dashboard list is sent to subscribers of quantitative and value risk with the most profitable companies standing in the better half among their peers in relation to all three evaluation metrics at the same time. The list below was sent to subscribers several weeks ago based on data available at this time.

TDC

Teradata Corporation

KLIK

Kulicke and Sofa Industries Inc

ZD

Ziv Davis Company

THRY

Thrive Holdings Inc

additional

Extreme Networks Inc

SWKS

Skyworks Solutions Inc

NXPI

NXP Semiconductor NV

It’s a rotating list with a statistical bias toward long-term excess returns, not the result of every stock analysis.

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