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Is SPDR S&P Software & Services ETF (XSW) a Strong ETF Right Now?

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A smart beta exchange traded fund, the SPDR S&P Software & Services ETF (XSW - Free Report) debuted on 09/28/2011, and offers broad exposure to the Technology ETFs category of the market.

What Are Smart Beta ETFs?

Market cap weighted indexes were created to reflect the market, or a specific segment of the market, and the ETF industry has traditionally been dominated by products based on this strategy.

A good option for investors who believe in market efficiency, market cap weighted indexes offer a low-cost, convenient, and transparent way of replicating market returns.

There are some investors, though, who think it's possible to beat the market with great stock selection; this group likely invests in another class of funds known as smart beta, which track non-cap weighted strategies.

Based on specific fundamental characteristics, or a combination of such, these indexes attempt to pick stocks that have a better chance of risk-return performance.

The smart beta space gives investors many different choices, from equal-weighting, one of the simplest strategies, to more complicated ones like fundamental and volatility/momentum based weighting. However, not all of these methodologies have been able to deliver remarkable returns.

Fund Sponsor & Index

The fund is managed by State Street Global Advisors. XSW has been able to amass assets over $222.05 million, making it one of the average sized ETFs in the Technology ETFs. This particular fund, before fees and expenses, seeks to match the performance of the S&P Software & Services Select Industry Index.

The S&P Software & Services Select Industry Index represents the software sub-industry portion of the S&P Total Stock Market Index. The S&P TMI tracks all the U.S. common stocks listed on the NYSE, AMEX, NASDAQ National Market and NASDAQ Global Select Market. The Software Index is a modified equal weight index.

Cost & Other Expenses

Investors should also pay attention to an ETF's expense ratio. Lower cost products will produce better results than those with a higher cost, assuming all other metrics remain the same.

With one of the least expensive products in the space, this ETF has annual operating expenses of 0.35%.

The fund has a 12-month trailing dividend yield of 0.19%.

Sector Exposure and Top Holdings

Even though ETFs offer diversified exposure that minimizes single stock risk, investors should also look at the actual holdings inside the fund. Luckily, most ETFs are very transparent products that disclose their holdings on a daily basis.

For XSW, it has heaviest allocation in the Information Technology sector --about 96.40% of the portfolio.

Taking into account individual holdings, Zynga Inc. Class A accounts for about 0.86% of the fund's total assets, followed by Moneygram International Inc. (MGI - Free Report) and Activision Blizzard Inc. (ATVI - Free Report) .

Its top 10 holdings account for approximately 7.49% of XSW's total assets under management.

Performance and Risk

Year-to-date, the SPDR S&P Software & Services ETF has lost about -28.94% so far, and is down about -31.56% over the last 12 months (as of 06/28/2022). XSW has traded between $105.50 and $186.85 in this past 52-week period.

The fund has a beta of 1.18 and standard deviation of 31.06% for the trailing three-year period, which makes XSW a high risk choice in this particular space. With about 201 holdings, it effectively diversifies company-specific risk.

Alternatives

SPDR S&P Software & Services ETF is an excellent option for investors seeking to outperform the Technology ETFs segment of the market. There are other ETFs in the space which investors could consider as well.

Invesco Dynamic Software ETF (PSJ - Free Report) tracks Dynamic Software Intellidex Index and the iShares Expanded TechSoftware Sector ETF (IGV - Free Report) tracks S&P North American Technology-Software Index. Invesco Dynamic Software ETF has $216.24 million in assets, iShares Expanded TechSoftware Sector ETF has $4.37 billion. PSJ has an expense ratio of 0.56% and IGV charges 0.43%.

Investors looking for cheaper and lower-risk options should consider traditional market cap weighted ETFs that aim to match the returns of the Technology ETFs.

Bottom Line

To learn more about this product and other ETFs, screen for products that match your investment objectives and read articles on latest developments in the ETF investing universe, please visit Zacks ETF Center.

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