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Is the IBM Earnings Miss a Bad Sign for Tech ETFs?

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International Business Machines Corp. (IBM - Free Report) , the largest computer-services provider, has a long track record of beating or at least meeting the Street’s expectation for earnings. But in the first quarter, the company missed its earnings mark for the first time since 2005. T

he company also missed on the top line, in a quarterly performance that is sure to add to growing concerns about the market and the economy. IBM saw EPS of $3.00, which missed the Zacks Consensus Estimate by 6 cents per share. Revenues were also disappointing, with a year-ago decline of 5.1% and sequential downfall of 20.1%.

The lackluster performance was due to a hardware slump and failure to close large deals. Further, the weakness in the Japanese yen added to the woes as the falling yen translated into fewer dollars in sales in Japan (read: Japanese Yen ETF Investing 101).

Overall, this miss was rare and shocking, and has come as a blow to the company’s stock price. IBM was down in double digits after the announcement of the first quarter results.

Though the first quarter was among the weakest in the company’s recent history, the outlook for IBM remains positive for the long run. The company expects to benefit from investments in growth initiatives and is focusing on growing its software business, which is considered more profitable than hardware.

Quite predictably, this led to mixed reactions in many technology ETFs. While the miss crushed some ETFs, the optimism surrounding its growth led to fast recovery. This has been true in particular for those funds that have major holdings in IBM, and those that have a big focus on large caps in general (read: Is the Tech ETF Signaling Trouble Ahead?).

Given this, we have highlighted three of the biggest holders of IBM stock in ETF form and how they have held up in light of its terrible earnings report:

iShares Dow Jones US Technology ETF (IYW - Free Report)

This is by far one of the largest and popular funds in the technology space having an impressive asset base of $1.8 billion. This fund tracks the Dow Jones US Technology index, holding 136 stocks in its basket while charging investors a higher fee of 46 bps a year.

Of the major holdings, IBM takes the fourth position in the portfolio, making up 8.45% of assets. The product is heavily skewed towards the technology hardware and equipment segments, as these make up for more than half of the portfolio. Software and computer services take the remaining portion in the basket.

Following the announcement, the fund finished the day down about 1.4% and has not been able to recover fully as the ETF is up just 0.49% year-to-date. IYW currently has a Zacks ETF Rank of #4 or ‘Sell’ with a high risk outlook, suggesting the fund will underperform its counterparts over the long haul (see more ETFs in the Zacks ETF Center).

First Trust NASDAQ Technology Dividend Index Fund (TDIV - Free Report)

This is one of the latest additions to the tech ETF space, focusing on technology companies that pay out dividends. This is done by tracking the NASDAQ Technology Dividend Index which is a broad benchmark of tech and telecom firms (weighted 80/20 in favor of tech) that have a yield of at least 0.5% and have not decreased dividends in the past one year.

In total, the fund holds about 79 securities in its basket. Of these firms, IBM takes the fourth spot, making up roughly 7.57% of the assets. From a sector perspective, semiconductors & semiconductor equipment takes the largest share of 22.54%, closely followed by computers & peripherals (14.10%) and diversified telecommunication services (13.48%).

Due to its exposure, TDIV has not fallen much with just 0.4% decline on the day of the IBM’s earnings release (read: Three Tech ETFs Still Going Strong). The ETF is unpopular but it outpaced the popular IYW, adding 9.32% in the year-to-date timeframe. This is a high cost product in the tech space with AUM of $84.4 million.

iShares S&P Goldman Sachs Technology Index Fund (IGM - Free Report)

This ETF follows the S&P North American Technology Sector Index and has amassed $486.3 million in its asset base. It holds 268 securities in total while charging 48 bps in fees and expense.

IBM takes the fourth position in the basket with 6.93% of the assets. All sectors make up for nice mix in the portfolio with software taking the top spot while IT services, computer & peripherals, and Internet software & services rounded off to the next three spots.

In terms of performance, IGM slumped roughly 1.4% on the day of IBM’s results but easily got rid out of the decline in the three trading sessions. The fund is up 5.26% year-to-date. The ETF currently has a Zacks ETF Rank of #2 or ‘Buy’ with medium risk outlook, suggesting that this product is expected to perform well over the long haul, when compared to the other funds in the sector.

Bottom Line

The performances of the tech ETFs are not tied to IBM alone but are largely dependent on the earnings of a few giants like Apple (AAPL), Google (GOOG), Microsoft (MSFT), Oracle (ORCL) and IBM on a combined basis.

Currently, many tech firms are seeing weak overseas demand, overall reduction in global information technology spending, and a strong dollar just to name a few headwinds to global tech stocks.

However, the technology sector is clearly a long-term growth prospect for investors willing to wait out short term volatility. The sector should return to their market dominance over time, especially as the cloud computing and mobility segments grow in importance and offer up new avenues for growth in the sector.

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