IXN: A Bet on Big Tech with a Global Flavor

When the markets shuddered to start the year, tech stocks were among those hardest hit, as the NASDAQ-100 Index lost more than one-quarter of its value from the end of October to mid-March.

But tech stocks, especially those of the biggest players with global reach, have been rallying since, with the big-tech index—home to many key holdings of iShares S&P 500 Global Technology ETF (IXN)—up 18.3% since March 10.

IXN, one of several tech funds making its way up the Sector Momentum Table of our ETF Momentum Tracker, followed suit. Coming off an all-time high on Nov. 2, IXN’s NAV dipped 16.3% over nearly six months, followed by a 13.7% gain since March 17 (through May 6). The fund has been helped by a weak dollar and international exposure.

The fund tracks the S&P Global Technology Sector Index, a subset of the S&P Global 1200. It’s market-weighted and prone to sizable bets on the world’s biggest companies, with just less than half of its assets now earmarked to the top 10 holdings. The fund also carries an average market cap of $57.84 billion, larger than the average cap for the S&P 500. Morningstar classifies nearly two-thirds of IXN stocks as giant-cap and nearly 90% as large-cap or bigger.

The fund spreads its holdings across a wide variety of tech sub-sectors, with a top-six consisting of giants from software (Microsoft (MSFT)), business services (IBM (IBM)), hardware (Apple (AAPL)), networking and peripherals (Cisco (CSCO)), chips (Intel (INTC)) and Internet services (Google (GOOG)). The top 10 even includes communications equipment giant Nokia (NOK) and a pair of stocks coming off major acquisitions (Hewlett-Packard (HPQ) and Oracle (ORCL)). In these difficult economic times, and in an industry that’s closely tied to business spending and consumer confidence, big stocks with international reach are a good thing. These household names tend to be reliable cash-flow generators, using their scale to boost R&D, cut manufacturing costs and continue to stay on the cutting edge, according to Morningstar’s Harry Milling.

That said, it’s important to note that despite its “global” name, the cap-weighted formula results in a portfolio that’s only 30.8% foreign stocks, while investors are likely to find IXN’s names in more diversified funds.

When many tech stocks and funds struggled to start 2008, investors seemed concerned that the economic slowdown in the U.S. would result in cutbacks in tech spending by both industry and consumers. That hasn’t happened, at least not yet. The fund’s NAV did fall 3.7% from May 16 through June 9, as another round of oil price hikes and sluggish economic data stung tech stocks again.

Still, IXN’s three-month gain of 11.5% beat the S&P 500 by nearly seven percentage points. The fund’s second- through sixth-largest holdings all reported big earnings or beat estimates this spring. No. 3 Apple reported a 36% gain in revenues that helped shares jump 49.6% in three months. No. 2 IBM reported a 26% earnings gain and a positive outlook, helping shares gain 15.9% year to date. Other key holdings posted three-month gains on positive earnings reports, including Cisco (up 9%) and Intel (up 13.3%). No. 6 Google reported a 30% first-quarter profit increase, thanks to a 55% jump in international sales. Shares jumped 18% in a day, and are up 28.1% for three months.

No. 9 Taiwan Semiconductor (TSM) reported a 49% increase in first-quarter earnings, on rising worldwide sales of PCs and other gadgets. Shares are up 13.9% year to date.

The continuing merger dance between top holding Microsoft and Yahoo (YHOO) bears watching. It continues for now, and each news report—the latest has billionaire investor Carl Icahn trying to put the deal back together—sends share prices on a roller-coaster ride. Icahn owns a 4.3% stake in Yahoo and hopes it can fetch more than $49 billion in a Microsoft buyout. Microsoft has, for the moment, withdrawn its offer, which last stood at about $47 billion.

Microsoft shares are down 23% year to date, one of just two IXN top 10 holdings with a negative three-month return. Shares of Yahoo, the fund’s 21st-largest holding, are up more than 28% for three months.

The other downward-moving top holding is Nokia, which has seen shares dip 19.9% in three months and 31% year to date, due to struggles with competition, flagging sales and some concern about European consumer spending.

All that movement in both directions underscored the level of risk in the tech sector. Though the fund’s three-year standard deviation of 14.14 is the lowest low for a tech ETF—tech funds can range to 28 and beyond, and the other iShares tech funds range from 15.72 to 15.89—it’s still nearly twice that of the S&P 500, despite the fund’s giant-cap tilt.

Shareholders may view IXN as a low-risk bet on global technology, and it can be. But because it's cap-weighted, there are limits to its diversification to some extent, both in terms of stocks and geography.