In my articles for theStreet.com I often talk about taking the time to keep tabs on any individual stocks with disproportionately large weightings in any ETFs owned. There are quite a few sector funds and single country funds that have 15-20%, even more, in just one stock or in the case some telecom ETFs there can be that much in a couple of stocks.
So it is with most technology ETFs that have 20-25% in Apple (AAPL), including the ETFs we use for "large" separate accounts and RRGR which is the ETF we manage. The way the numbers work out our position in Apple, by virtue of its weighting in IYW and IXN was around 4% of the portfolio. I seem to remember Apple's weight being 10-12% of tech ETFs a few years ago but of course the stock has done much better than most of the sector and has grown to now being 20-25%.
In the last month the stock is up 15%, which is far ahead of the sector. The recent lift is probably due at least in part to excitement about the next version of the iPhone, apparently iPhone 5, the iPad Mini and the prospects of what iTV might end up being. The recently initiated dividend hasn't hurt either.
In the last few years the products and the stock have both become ubiquitous. The stock has been the largest by market cap for a while now and it seems like there has been a contest among sell side analysts to come up with ever higher price targets.
I have no great bear case for Apple specifically but there are some markers in this instance that have meant trouble in the past for other stocks. Other than Exxon Mobil (XOM) it has been difficult for companies to maintain the top market cap spot. Many people believe the stock is different. The business with analysts and price targets is reminiscent of the dot com era. A little more anecdotal, it seems like any interview with a portfolio manager includes "so how much Apple do you own." As mentioned in a recent post, if you watch stock market television for a few hours you will be made acutely aware that there is at least a serious infatuation with the stock although you probably know this already.
Again, this is not a fundamental bear case just a few words of caution about a stock that has grown dramatically to become about 4% of the portfolio picking up some warning signs along the way.
Our trade was to sell half of clients' core tech ETF position and roll that dollar for dollar into the new First Trust Nasdaq Technology Dividend ETF (TDIV). TDIV has no Apple for now and based on my understanding of the methodology will not have Apple for at least a year and when it finally is added it will target about a 7% weighting.
The net effect was to cut our Apple exposure in half after a breakout that I think is discounting in the near term, future news such that I think the product announcements are mostly in the price now.
TDIV is a dividend oriented fund. I called into First Trust and was told the yield for the index is "a little over 3%" which would put the yield for the fund in the mid-high twos but I have seen other commentary that says the yield is quite a bit higher than what I was told. TDIV, similar to XLK from SPDR has a small allocation to telecom so to be precise we have reduced our tech exposure a little but if the market rips higher then the tech portion will grow faster and the fund should pick up some tech beta until the next rebalance. If the market pukes down then the tech portion will will go down faster and the fund will become more defensive until the next rebalance.
As far as the yield, I will assume mid-high twos which is better than we've been getting in our other funds. This shift also makes some sense if we are later in the stock market cycle and given that the SPX bottomed 41 months ago, that seems plausible.
If Apple skyrockets from here, we still own the stock albeit in a smaller weighting, a little under 2% now. If the stock goes to $1,111, as one analyst is calling for, then our position would grow to a little over 3%.
We've had good/lucky experiences with reducing positions into what seems like a euphoric environment quite a few times in the past including gold about a year ago and are likely to stick with the strategy. I view it as a can't lose trade; if it goes down then we reduced at a good time and if it goes up we still own it.
The picture is of the Grand Tetons through a window at the Cunningham Cabin.