Brief Breakdown: Technology Select Sector SPDR Fund (Ticker: XLK)
In my Brief Breakdowns,I pick a stock and present opposite sides – I present the bullish argument and the bearish argument.
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Company Description and Qualitative Analysis
The Technology Select Sector SPDR Fund seeks to provide investment results that mirror the Technology Select Sector Index by giving exposure to the technology sector of the S&P 500 index. This fund invests in companies from the technology hardware, storage, peripherals, software, communications equipment, semiconductors and semiconductors equipment, IT services, and electronic equipment, instruments, and components. This ETF allows investors to get broad exposure to one of the more lucrative sectors of the past decade. Growth has definitely been hurting as of late, but the need for technology is more important now than ever.
Quantitative Analysis
At the time of this writing (8/28/2022), XLK is trading at $139.88 with a 52 week range of $122.47 - $177.04. The top 10 holdings of Apple Inc. at 24.79%, Microsoft Corporation 21.68%, NVIDIA Corporation 4.66%, Visa Inc. Class A 3.59%, Mastercard Incorporated Class A 3.08%, Broadcom Inc. 2.34%, Cisco Systems Inc. 2.04%, Accenture Plc Class A 2.04%, Adobe Incorporated at 1.98%, and Salesforce Inc. at 1.80%. You can view XLK holdings here.
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Bullish Thesis
Here are three points to support the bullish thesis updates:
Greater demand for tech: Tech is nearly a necessity in society these days. Many use tech to make a living and stay connected with their businesses across the world. Some businesses could not operate without the development of technology and the number of companies like this is growing by the day. As businesses and people rely more on tech, the number of tech companies, products, and the amount in the workforce working in tech will continue to grow.
All aspects of technology: Many technology companies specialize in a certain area of the industry. This ETF allows you to touch all aspects of the industry without over exposing yourself to one area/subsection of the industry. The broad exposure of an ETF has advantages and disadvantages, but I believe in this case the broad exposure to tech is powerful as tech overall is rapidly growing.
Rapid development: Tech is allowing businesses and people to become more efficient in their everyday lives. Tech will continue to grow for this specific reason. Efficiency of markets, the workforce, businesses, and much more will be demanded in order for people to have more time to do seemingly everything else they desire. I believe this trend has persisted and will continue for the future.
Bearish Thesis
Here are three points to support the bearish thesis:
Over Exposure to Apple and Microsoft: Nearly 50% of the fund is made up of two companies: Apple and Microsoft. This seems to beg the question, why invest in this ETF if the success is made up of just two companies? For me, this seems like you are paying a fee for major exposure to two companies that you could invest in individually.
Global Recession: It is no secret that the overall macro environment is in a worrisome place. Last recession or major stock market crash, the technology sector was one of the hardest hit sectors. Hopefully by investing in this ETF you would not feel as bad of a hit as many did in the COVID crash, but if the past tells us anything it is that tech is one of the more volatile sectors. Volatility can be good because it works in both directions, but amidst a recession I am not confident that tech is immune.
Semiconductor shortage may persist: The potential for a China and Taiwan conflict seems to be inching closer and with Taiwan Semiconductors as one of the major players in the chip space it seems like this could be a major issue that is not fixed in the near future. There have been hints of overproduction of chips, but how long would this supply last if exports stop? The US and other developed countries need to become more self-sufficient, but this takes time and in the short term this conflict would be bad news for the chip industry and thus the tech industry.
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Have a great week everyone,
Brandon
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Disclosure: The article was written by Brandon Keys, and it expresses the author's own opinions. I am not receiving compensation for it. I have no business relationships with any company whose stock is mentioned in this article. The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock. Brandon is not a financial advisor. I encourage all readers to do further research and do your own due diligence before making any investments.
Thanks for the write-up!