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ETFs to Watch on Apple Earnings Beat and Microsoft Miss

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Two technology giants – Apple (AAPL) and Microsoft (MSFT) – attracted investor focus following their mixed quarterly results posted after the closing bell on Thursday. Apple surpassed the earnings estimate in its third quarter fiscal 2014 results while Microsoft modestly missed the earnings estimate in its fourth quarter fiscal 2014.

Apple Results in Focus

Earnings per share came in at $1.28, which comfortably surpassed the Zacks Consensus Estimate of $1.22 and improved from the year-ago earnings of $1.23. The company’s earnings growth reached the highest rate in seven quarters driven by robust sales of iPhones and Mac devices and continued revenue growth from the Apple ecosystem.

Revenues rose 6% year over year to $37.4 billion. Gross margin was 39.4%, up from 36.9% in the year-ago quarter and higher than the company’s expectation of 37–38% (read: Top ETF Picks for Q2 Earnings Season).

Apple sold 35.2 million iPhones, up 13% from the year-ago quarter but missed the Wall Street estimate of 36 million. Meanwhile, sales for Mac desktop computers grew 18% to 4.4 million while iPad sales fell 9% to 13.2 million.

High hopes for new iPhones and other products slated to be released before this fall have hurt revenue in the last quarter and expected to do in the current quarter as well. This is especially true as the customers are holding off their purchases until the new model hits the market. The company plans to unveil new bigger-screen iPhones (expected in September), a wearable gadget, and an upgrade to its Apple TV set-top box in order to bolster earnings.

The ubiquitous gadget-maker sees revenues in the range of $37–$40 billion for the current quarter. Further, Apple expects gross margin in the range of 37–38% for the fourth quarter of fiscal 2014.

Microsoft Results in Focus

The software giant reported earnings of 58 cents per share, missing the Zacks Consensus Estimate by couple of cents and decreasing from the year-ago earnings by a penny. Revenues climbed 17% year over year to $23.38 billion (read: 3 ETFs with Most Exposure to Microsoft).

While strong growth in the company’s cloud-based software offerings boosted revenues in the last quarter, the acquisition of Nokia's money-losing handset business and its subsequent shedding of workforce took a toll on its bottom line. As such, the modest Q4 earnings miss does not seem to be much of a concern as MSFT is pushing itself into the mobile and cloud computing world from the traditional software space, suggesting strong optimism for the company’s future growth.   

Market Impact

AAPL shares shed 0.60% at the close in after-market trading on Thursday while MSFT shares rose nearly 1.4%. The shares of Apple and Microsoft are up 19.6% and 21.6% in the year-to-date time frame and reached multi-year highs last week. Further, both the stocks have a decent Zacks Rank #3 (Hold), underscoring that it might have a potential for more upside in the coming months.

Given the mixed results from the two-tech behemoths, investors should closely watch the movement in these technology-focused ETFs and should tap the opportunity arising from the robust growth outlooks. While there are several options in the ETF world, we have highlighted some of the funds from different categories that have largest exposure to Apple and Microsoft.

ETFs to Watch

Technology ETFs: The three most popular U.S. ETFs in the tech space could see busy trading in the next few days. This is because AAPL and MSFT occupy the top two positions in the Select Sector SPDR Technology ETF ((XLK - Free Report) ), Vanguard Information Technology ETF ((VGT - Free Report) ) and iShares Dow Jones US Technology ETF ((IYW - Free Report) ) with at least 14% and 8% share, respectively.

The three funds are Buy-rated with Zacks Rank of 1 or ‘Strong Buy’ in case of XLK and VGT while Zacks Rank of 2 or ‘Buy’ for IYW (see: all the Technology ETFs here).

iShares Global Tech ETF ((IXN - Free Report) ) provides broad exposure to technology stocks from around the world. Here also, AAPL and MSFT make up for the first two spots in the basket at 13.3% and 7.9% of assets, respectively. All the four ETFs gained double digits so far this year.

Dividend ETFs: Since the two tech giants pay robust dividends, their inclusion into the dividend ETFs holdings are justified. Notably, First Trust NASDAQ Technology Dividend Index Fund ((TDIV - Free Report) ) measures the performance of the dividend payers within the technology sector. Microsoft takes the second spot with 8.35% share while Apple takes the fourth position in the basket at 7.92%. The ETF is up nearly 13% in the year-to-date time frame.

Both firms are among the top three holdings in WisdomTree U.S. Dividend Growth ETF ((DGRW - Free Report) ) and Vanguard High Dividend Yield ETF ((VYM - Free Report) ) and account for at least 4% share. VYM rose 9% so far in the year and has a strong Zacks Rank of 2 or ‘Buy’ rating while DGRW added slightly lower 6.27% for the same time period (read: 3 Dividend ETFs Crushing the Market).  

Large Cap ETFs: Funds like PowerShares QQQ ((QQQ - Free Report) ) and PowerShares Fundamental Pure Large Growth Portfolio ((PXLG - Free Report) ) are skewed toward the information technology sector and the top two firms – Apple and Microsoft. Apple accounts for 12.9% in QQQ while 8% in PXLG. On the other hand, Microsoft takes more than 8% share in both QQQ and PXLG. Both the ETFs are up in double digits in the year-to-date time frame. PXLG has a Zacks Rank of 2 while QQQ carries a Zacks Rank of 3 or ‘Hold’ rating.

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