Best And Worst Q1'16: Information Technology ETFs, Mutual Funds And Key Holdings

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Includes: AMAT, ARKK, RYINX, SMH, TRMB, VITAX
by: David Trainer

Summary

The Information Technology sector ranks third in Q1'16.

Based on an aggregation of ratings of 28 ETFs and 109 mutual funds.

SMH is our top-rated Information Technology ETF and VITAX is our top-rated Information Technology mutual fund.

The Information Technology sector ranks third out of the ten sectors as detailed in our Q1'16 Sector Ratings for ETFs and Mutual Funds report. Last quarter, the Information Technology sector ranked second. It gets our Neutral rating, which is based on aggregation of ratings of 28 ETFs and 109 mutual funds in the Information Technology. See a recap of our Q4'15 Sector Ratings here.

Figures 1 and 2 show the five best and worst-rated ETFs and mutual funds in the sector. Not all Information Technology sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 25 to 397). This variation creates drastically different investment implications and, therefore, ratings.

Investors seeking exposure to the Information Technology sector should buy one of the Attractive-or-better rated ETFs or mutual funds from Figures 1 and 2.

Figure 1: ETFs with the Best & Worst Ratings - Top 5

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* Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity.

Sources: New Constructs, LLC and company filings

The PowerShares Dynamic Semiconductors Portfolio (NYSEARCA:PSI) is excluded from Figure 1 because its total net assets are below $100 million and do not meet our liquidity minimums.

Figure 2: Mutual Funds with the Best & Worst Ratings - Top 5

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* Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity.

Sources: New Constructs, LLC and company filings

The Fidelity Advisor Communications Equipment Fund (MUTF:FDMIX) is excluded from Figure 2 because its total net assets are below $100 million and do not meet our liquidity minimums.

The Market Vectors Semiconductor ETF (NYSEARCA:SMH) is the top-rated Information Technology ETF and the Vanguard Information Technology Index Fund (MUTF:VITAX) is the top-rated Information Technology mutual fund. Both earn a Very Attractive rating.

The ARK Innovation ETF (NYSEARCA:ARKK) is the worst-rated Information Technology ETF and the Rydex Internet Fund (MUTF:RYINX) is the worst-rated Information Technology mutual fund. ARKK earns a Dangerous rating and RYINX earns a Very Dangerous rating.

511 stocks of the 3000+ we cover are classified as Information Technology stocks.

Applied Materials (NASDAQ:AMAT) is one of our favorite stocks held by SMH and earns an Attractive rating. Going back to 1998, the earliest year in our model, Applied Materials has grown after-tax profit (NOPAT) by 10% compounded annually. AMAT currently earns a 12% return on invested capital (ROIC) and has generated over $2.8 billion in free cash flow over the last three years. Despite the nearly two decades of strong business operations, AMAT shares are significantly undervalued. At its current price of $16/share, AMAT has a price to economic book value (PEBV) ratio of 1.1. This ratio means that the market expects Applied Materials to grow profits by only 10% over its remaining corporate life. If Applied Materials can grow NOPAT by just 5% compounded annually (half its historical rate) over the next decade, the stock is worth $20/share today - a 25% upside.

Trimble Navigation (NASDAQ:TRMB) is one of our least favorite stocks held by ARKK and earns a Dangerous rating. In five of the past six years Trimble has generated negative economic earnings. In fact, the only time TRMB generated consecutive years of positive economic earnings was during the economic boom from 2004-2008. Since then, the company's ability to create shareholder valued has deteriorated. Since 2008, the company's ROIC has declined from 10% to 6%. Investors have taken notice of the downward trend in Trimble's operations as the stock has fallen 26% over the past year, but shares remain overvalued. To justify its current price of $21/share, Trimble must grow NOPAT by 15% compounded annually for the next 17 years. This expectation seems highly optimistic given the recent history of deteriorating business operations at Trimble.

Figures 3 and 4 show the rating landscape of all Information Technology ETFs and mutual funds.

Figure 3: Separating the Best ETFs From the Worst ETFs

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Sources: New Constructs, LLC and company filings

Figure 4: Separating the Best Mutual Funds From the Worst Mutual Funds

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Sources: New Constructs, LLC and company filings

Disclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, sector or theme.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.