Jan. 16, 2015 | Download PDF

Key Takeaways

  • Cash-rich, mature tech companies may take actions designed to help unlock shareholder value
  • The sector seems to be poised to withstand rising rates and benefit from growing capital expenditures (capex)
IWY

iShares U.S. Technology ETF provides exposure to electronics, computer software and hardware, and information technology stocks


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Yesterday's tech for today

The S&P 500 has more than tripled in value since 2009, leading many to declare that U.S. stocks are fully valued. Taken as a whole, we would tend to agree. However, we still see opportunity in at least one sector – technology. While tightening monetary policy by the Fed and slowing growth abroad threaten to take the steam out of the bull market, we feel that tech stocks, particularly those of mature tech companies, are well positioned and offer meaningful upside potential in the near-term for the following reasons:

1. Strong balance sheets

Thanks to their enviable financial health, we believe tech companies are well positioned to potentially deliver shareholder returns over the coming year through share repurchases, dividend increases and M&A activity.

  • High-quality, mature tech companies may be more inclined to take these actions and, in some cases, are being pushed to do so by activist investors.
  • Apple, Microsoft, Google and Cisco possess a combined $345 billion in cash –- about 23% of total corporate cash reserves in the U.S. –- and the overall tech sector claims over half of such cash, according to dailyfinance.com.
  • Share buybacks by S&P 500 tech companies have already begun to accelerate, increasing by 40.4% from Q2 to Q31.

2. Reasonably valued with upside potential

Tech stock valuations are moderately above their long-term average2, yet we find current levels justifiable and believe there is additional room to run.

  • Over the last three years, the performance of the tech sector has been driven more by earnings growth than by multiple expansion3 ― a trend we expect to continue.
  • Tech companies are posting impressive cash flows, and currently have the second-highest free cash-flow yield among all sectors in the S&P 5003.

3. Well positioned for upcoming rate and capital expenditure (capex) cycles

With the U.S. economy continuing to improve, the Fed is widely expected to raise rates in 2015.

  • Increasing borrowing costs should have less of an effect on tech as it is the only sector with positive net cash (Figure 1).
  • Tech has historically performed well during periods of rising rates, particularly compared to sectors with more debt.4
  • As a pro-cyclical growth sector, tech stands to benefit from continued economic improvement and an expected increase in capital spending by U.S. companies across the board.

Figure 1: Net debt to market cap for S&P 500 sectors

Net debt to market cap for S&P 500 sectors

Source: Compustat, BofA Merrill Lynch Equity & U.S. Quant Strategy, as of 10/24/14.

A Way to Play

IYW

Tech funds come in several varieties, with some holding telecom and healthcare tech stocks or recent IPOs. To take advantage of the opportunity we’ve outlined, we favor focusing on mainly blue-chip tech companies. One way to do this is with the iShares U.S. Technology ETF (IYW), which offers:

  • Dedicated exposure to electronics, computer software and hardware, and information technology stocks
  • Sizeable holdings in mature tech companies including Apple, Microsoft, Google, Intel, IBM, Cisco and Oracle

Top 10 Holdings

Apple 18.7%
Microsoft 11.0%
Intel 5.1%
Facebook 4.6%
Google Class A 4.2%
IBM 4.2%
Cisco 4.1%
Google Class C 4.1%
Oracle 4.0%
Qualcomm 3.5%

As of 1/14/15. Holdings subject to change.

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Carefully consider the Funds' investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds' prospectuses or, if available, the summary prospectuses, which may be obtained by visiting the iShares ETF and BlackRock Fund prospectus pages. Read the prospectus carefully before investing.

Investing involves risk, including possible loss of principal.

Information on non-iShares ETF securities is provided strictly for illustrative purposes and should not be deemed an offer to sell or a solicitation of an offer to buy shares of any security other than the iShares Funds, that are described in this material.

Holdings are subject to change.

Funds that concentrate investments in specific industries, sectors, markets or asset classes may underperform or be more volatile than other industries, sectors, markets or asset classes and than the general securities market.

Technology companies may be subject to severe competition and product obsolescence.

This material represents an assessment of the market environment as of the date indicated; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.

The information presented does not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy or investment decision.

The Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).

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