XNTK: Technology Dashboard For July

A top-down analysis of the information technology sector reveals that while the software industry is near its 11-year valuation and quality averages, other subsectors, particularly computer and hardware, are moderately to greatly overvalued. The report also compares tech ETFs, highlighting that the equal-weighted SPDR NYSE Technology ETF (XNTK), despite slightly underperforming the capital-weighted Technology Select Sector SPDR ETF (XLK) over 10 years, has outperformed XLK by approximately 7 percentage points in the last 12 months, offering investors a more diversified exposure away from mega-cap concentration.

Analysis

A quantitative, top-down analysis of the information technology sector indicates significant valuation discrepancies among its subsectors relative to 11-year historical averages. While the software industry currently trades near its historical norms for both value and quality, all other subsectors are assessed as moderately to greatly overvalued. The computer and hardware industry stands out as having the weakest profile, with the lowest scores for both value and quality. This divergence is reflected in the performance of thematic ETFs. The equal-weighted SPDR NYSE Technology ETF (XNTK), with its broader sector definition and annual rebalancing, has outperformed the mega-cap concentrated, capitalization-weighted Technology Select Sector SPDR ETF (XLK) by approximately 7 percentage points over the last 12 months. This recent outperformance contrasts with its slight underperformance over a 10-year horizon (XNTK's +531% vs. XLK's +586%), suggesting a market environment that may be favoring diversification away from the largest constituents. Furthermore, XNTK presents a more favorable profile than a comparable equal-weight ETF, RSPT, with a lower expense ratio (0.35% vs. 0.40%) and superior 10-year returns, though it has lower trading liquidity.

Key Decisions for Investors

• Given the assessment of widespread overvaluation, investors should exercise caution, particularly in the computer and hardware subsector which exhibits the worst value and quality scores.
• For investors seeking to mitigate mega-cap concentration risk within the tech sector, reallocating a portion of capital from cap-weighted funds like XLK to an equal-weighted ETF like XNTK could be a prudent strategy, given its recent outperformance and more balanced portfolio.
• The software subsector, trading near its 11-year average on valuation and quality metrics, may present a relatively more attractive area for stock-picking compared to other overvalued segments of the technology sector.
• When considering an investment in XNTK, be mindful of its lower average daily trading volume ($5.7M), which could be a constraint for large-scale institutional positions compared to more liquid alternatives.