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ETFs in Spotlight after Apple and Microsoft Earnings

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Two technology giants – Apple (AAPL - Free Report) and Microsoft (MSFT - Free Report) – grabbed investor attention following their quarterly results after the closing bell on Tuesday. While the duo topped our earnings and revenue estimates, it failed to excite investors leading to sharp decline in their share prices in after-hour trading.

This is especially true as a weak revenue outlook and lower-than-expected Apple iPhone sales along with disappointing Microsoft’s Windows sales shook investors’ confidence in the growth prospects of both.

Apple Results in Focus

Earnings per share came in at $1.85, which comfortably surpassed the Zacks Consensus Estimate by a nickel and improved from the year-ago earnings of $1.28. Apple has now surpassed earnings expectations for nine quarters in a row (read: 4 ETFs to Watch This Earnings Season).

Revenues climbed 33% year over year to $49.6 billion, and were well ahead of our estimate of $49.1 billion. This represents the highest rate of revenue growth in three years thanks to strong sales of iPhone, Apple Watch, Mac and App Store as well as China sales that more than doubled. Sales of iPhone surged 59% year over year to a new record of 47.5 million but fell shy of the Wall Street forecast of 49 million.

Meanwhile, sales of the Mac desktop computers grew 8.7% year over year to 4.8 million. However, iPad sales continued to disappoint for the sixth consecutive quarter, falling 18% to 10.9 million. Gross margin was 39.7%, up from 39.4% in the year-ago quarter and ahead of the company’s own guidance of 38.5–39.5%.  

The ubiquitous gadget-maker foresees revenues in the range of $49–$51 billion for the current quarter; the upper-end is below the Zacks Consensus Estimate of $51.32 billion. Further, Apple expects gross margin in the range of 38.5–39.5% for the fourth quarter of fiscal 2015.

Microsoft Results in Focus

The software giant reported earnings of 62 cents per share, beating the Zacks Consensus Estimate by six cents and improving from the year-ago earnings of 56 cents. Revenues fell 5% year over year to $22.18 billion but easily surpassed our estimate of $21.98 billion.

Year-over-year revenue decline came from weak Windows and Office software sales, and rising U.S. dollar that were more than offset by sales growth at Surface, Xbox, Bing, Office 365, Azure and Dynamics CRM Online. Notably, these non-window products have showed at least double-digit revenue growth in the reported quarter (read: 3 Sector ETFs to Watch on Revenue Growth Potential).

Microsoft has been ramping up its business in Internet cloud computing (Azure and Office 365) and mobile computing (Lumia smartphones and Surface tablets) that seems to be paying off. Further, Windows 10, the next version of Microsoft's flagship operating system, slated to launch later this year would help the company to win back customers and boost the top line.

Market Impact

Apple shares tumbled as much as 8.8% while Microsoft fell more than 4%. The dip in the share prices could provide a solid entry point for many investors given that Apple and Microsoft have a Zacks Rank #2 (Buy) and #3 (Hold), respectively, underscoring their potential upside in the coming months.

Given this, investors should closely watch the movement in these technology-focused ETFs and should tap opportunities as and when they arise. While there are several options in the ETF world, we have highlighted some of the funds from different categories that have the 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 17% and 8% share, respectively.

The three funds are Buy-rated with Zacks Rank of 1 or ‘Strong Buy’ for XLK and Zacks Rank of 2 or ‘Buy’ in the case of VGT and 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 15.9% and 7.9% of assets, respectively. All the four ETFs have gained over 6% so far this year.

Dividend ETFs: Since the two tech giants pay robust dividends, their inclusion into the dividend ETFs holdings is justified. Notably, First Trust NASDAQ Technology Dividend Index Fund ((TDIV - Free Report) ) measures the performance of the dividend payers within the technology sector. Microsoft and Apple take the first two tops with 8.6% share each. The ETF has lost nearly 4% in the year-to-date time frame.

Apart from this, Apple and Microsoft are the second and third holdings in WisdomTree U.S. Dividend Growth ETF ((DGRW - Free Report) ) with 4.5% and 3.8% share, respectively. The fund has risen 2.3% so far in the year and has a strong Zacks Rank of 3 or ‘Hold’ rating (read: 5 Dividend ETFs for Growth).  

Large Cap ETFs: Funds like Recon Capital NASDAQ 100 Covered Call ETF (QYLD - Free Report) and PowerShares QQQ (QQQ - Free Report) are skewed toward the information technology sector and the top two firms – Apple and Microsoft. Apple accounts for about 14% each in both QYLD and QQQ while Microsoft takes more than 7% share. QYLD is up in 4.5% and QQQ, having a Zacks ETF Rank of 2, has gained in double digits in the year-to-date time frame.

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