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Take a Bite Out of Apple with These ETFs

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The technology sector has been on fire this year thanks to a deluge of upbeat earnings reports and improving fundamentals that have sent many stocks to multi-year highs. Among these, a noteworthy stock is the technology giant Apple (AAPL - Free Report) , which has regained its momentum after seeing the worst decline in years (Technology ETFs Hitting All-Time High).

The stock is once again a darling of investors and surged to all-time intraday high of $135.09 a share, breaking its record of $134.54 a share set in April 2015. The rally came following the blockbuster fiscal first-quarter earnings report. The excitement surrounding the new iPhone 8 slated to release later this year is also acting as a major catalyst to share price improvement.

In particular, Apple has risen about 11.3% since its earnings announcement on January 31.

Peek Into Q1 Earnings

Earnings per share came in at $3.36, easily trumping the Zacks Consensus Estimate of $3.22 and improving 2.4% from year-ago earnings. Revenues increased 3.3% year over year to a record $78.4 billion and beat our estimate of $76.9 billion. With this, the technology giant returned to revenue growth after three quarters of decline.

Apple set all-time revenue records for iPhone, Services, Mac, and Apple Watch in the fiscal first quarter. It sold 78.3 million iPhones, up 5% year over year and well ahead of analyst expectations of 77.3 million units. This resulted in iPhone revenues of $54.4 billion and accounted for 69.4% of total revenue. Sales of Mac desktop computers returned to growth with increase of 1% in unit and 7% in revenue while unit sales for iPad declined 19% year over year.

Meanwhile, service revenue, which includes digital music, Apple Pay, cloud storage and apps, grew 18% year over year to $7.2 billion led by record customer activity on the App Store and accounted for 9.2% of total revenue (read: Dow ETF Tops Asset Flow: 5 Stocks Behind The Surge).

For the second quarter of fiscal 2017, the ubiquitous gadget-maker forecasts revenues in the range of $51.5 billion to $53.5 billion.

Key Highlights of The iPhone 8

Since Apple completed its tenth anniversary of iPhone, the hype surrounding the upcoming iPhone 8 is greater than the previous launches. This is because the new iPhone is expected to come with unique and efficient technology. Among others, the next-generation iPhone 8 is rumored to have an iris-scanner, which is the biggest highlight of the upcoming iPhone models.

The 5-inch model with full-glass design will likely feature an OLED display and support wireless charging. The teaming up of Apple with the Wireless Power Consortium WPC, the governing body of the Qi charging standard justifies rumors of its wireless charging feature (read: iPhone 8 Rumors: Will Apple Use Long-Distance Charging From Energous?).

Further, Apple’s CEO Tim Cook sparked speculation of the augmented reality feature in the new iPhone 8. These upgraded features would provide solid resurgence in revenue growth.

Analysts Upgrade

Driven by impressive results, most analysts are bracing for a big jump in stock price and thus raised their target price on Apple immediately after the earnings release. Goldman also raised the price target on February 13 citing that the expected release of iPhone 8 would be a game changer for the technology giant with the 3D sensor technology embedded in it. This suggests that the company is on a solid growth trajectory.

According to the analysts polled by Zacks, Apple has an average target price of $137.10 with more than 77% of them having a Strong Buy or a Buy rating.

Other Factors

Apple is expected to get a boost under Trump administration’s tax policies on foreign cash repatriation. The company looks to increase dividends and buybacks rather than invest in U.S. factories and jobs if Trump cuts corporate tax rates. As a result, Apple is expected to generate ROE of 33%. Additionally, UBS’ note released on Monday estimating that the market is undervaluing Apple's services business has propelled the stock to new highs (see: all the Technology ETFs here).   

Apple currently has a Zacks Rank #3 (Hold) and a VGM Style Score of A. Further, it has a solid Zacks Industry Rank in the top 37%, indicating smooth trading in the days ahead.

ETFs to Add in Your Portfolio

Given the bullish trend, we have highlighted six ETFs with heavy exposure to this tech giant for investors seeking to bet on the stock with a much lower risk

iShares Dow Jones US Technology ETF IYW

This ETF tracks the Dow Jones US Technology Index, giving investors exposure to 138 technology stocks. Apple occupies the top position in the basket with 17.2% of assets. The fund has AUM of $2.9 billion and charges 44 bps in fees and expenses. The fund has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with a Medium risk outlook.

Select Sector SPDR Technology ETF XLK

This most popular technology ETF follows the Technology Select Sector Index and has $14.2 billion in AUM. The fund charges 14 bps in fees per year from investors and holds about 72 securities in its basket. Of these firms, AAPL takes the top spot, making up roughly 14.9% of assets. It has a Zacks ETF Rank of 2 or ‘Buy’ rating with a Medium risk outlook (read: Top ETF Stories of January 2017).

Vanguard Information Technology ETF VGT

This fund manages about $10.3 billion in its asset base and provides exposure to a large basket of 365 technology stocks by tracking the MSCI US Investable Market Information Technology 25/50 Index. Here again, AAPL is the top firm with 13.3% allocation. The ETF has 0.10% in expense ratio and has a Zacks ETF Rank of 2 with a Medium risk outlook.

MSCI Information Technology Index ETF FTEC

This fund provides exposure to a basket of 366 technology stocks with AUM of $580.1 million. This is done by tracking the MSCI USA IMI Information Technology Index. Here too, AAPL is the top firm with 14.1% allocation. The ETF has 0.08% in expense ratio and a Zacks ETF Rank of 2 with a Medium risk outlook.

iShares Edge MSCI Multifactor Technology ETF TCHF

This ETF debuted in the space nine months ago and has already attracted $3 million in its asset base. It targets companies that have the potential to outperform the broad U.S. technology sector and tracks the MSCI USA Information Technology Diversified Multiple-Factor Capped Index. Holding 42 stocks in its basket, Apple occupies the top position accounting for 13.5% of the portfolio. TCHF charges 35 bps in fees per year.

iShares Global Tech ETF IXN

This product provides broad exposure to technology stocks from around the world by tracking the S&P Global 1200 Information Technology Sector Index. Holding 111 stocks in its basket, Apple takes the top spot with 13% share. American firms dominate the fund’s portfolio at 76.5% while Japan, South Korea and many other account for minor portion. The ETF has amassed $1.1 billion in its asset base and charges 47 bps in annual fees.


Bottom Line

Due to double-digit allocation to Apple, the above-mentioned products have returned nearly 4% over the last 10 days, which is higher than the gain of 2.7% registered by the broad market fund SPY. This trend is likely to continue given strong optimism for Apple’s future growth and favorable macro industry trends.

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