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

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

What Are Smart Beta ETFs?

For a long time now, the ETF industry has been flooded with products based on market capitalization weighted indexes, which are designed to represent the broader market or a particular market segment.

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.

Non-cap weighted indexes try to choose stocks that have a better chance of risk-return performance, which is based on specific fundamental characteristics, or a mix of other such characteristics.

Even though this space provides many choices to investors--think one of the simplest methodologies like equal-weighting and more complicated ones like fundamental and volatility/momentum based weighting--not all have been able to deliver first-rate results.

Fund Sponsor & Index

The fund is sponsored by State Street Global Advisors. It has amassed assets over $226.18 million, making it one of the average sized ETFs in the Technology ETFs. XSW seeks to match the performance of the S&P Software & Services Select Industry Index before fees and expenses.

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

When considering an ETF's total return, expense ratios are an important factor. And, cheaper funds can significantly outperform their more expensive cousins in the long term if all other factors remain equal.

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

It has a 12-month trailing dividend yield of 0.18%.

Sector Exposure and Top Holdings

While ETFs offer diversified exposure, which minimizes single stock risk, a deep look into a fund's holdings is a valuable exercise. And, most ETFs are very transparent products that disclose their holdings on a daily basis.

XSW's heaviest allocation is in the Information Technology sector, which is about 96.40% of the portfolio.

When you look at individual holdings, Forgerock Inc. Class A (FORG - Free Report) accounts for about 0.61% of the fund's total assets, followed by Sprout Social Inc Class A (SPT - Free Report) and Confluent Inc Class A (CFLT - Free Report) .

The top 10 holdings account for about 5.86% of total assets under management.

Performance and Risk

Year-to-date, the SPDR S&P Software & Services ETF has lost about -28.02% so far, and is down about -31.17% over the last 12 months (as of 08/29/2022). XSW has traded between $105.50 and $186.85 in this past 52-week period.

The ETF has a beta of 1.16 and standard deviation of 31.76% for the trailing three-year period, making it a high risk choice in the space. With about 203 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 $218.13 million in assets, iShares Expanded TechSoftware Sector ETF has $4.16 billion. PSJ has an expense ratio of 0.56% and IGV charges 0.40%.

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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