The hype over the new Apple (AAPL) iPhone has come and gone and it has left the stock trading near all-time highs and in striking distance of $700 per share. With AAPL being the largest publicly traded company in the world the rise in the stock price has buoyed mutual funds and ETFs in various sectors.
Instead of focusing on Apple, I am going to turn my attention to several technology ETFs that have exposure to the maker of the new iPhone. The ETFs will offer diversification for investors that do not want to put all their eggs into one basket and at the same time offer exposure to AAPL.
The SPDRs Technology Select Sector ETF (XLK) is composed of 81 technology-related stocks, however the number one holding makes up 20% of the entire allocation. That stock just happens to be AAPL and is a major reason the ETF is up 22% in 2012, easily beating the major benchmarks. When one stock makes up one-fifth of an ETF it is typically a signal to move on to the next option. In this case I am okay with the situation because I am bullish on the stock in question, AAPL.
Not only does my firm own AAPL, it also owns shares of XLK. The beauty of XLK is that investors get a good amount of exposure to AAPL and at the same time it offers shares in IBM (IBM) and Microsoft (MSFT). The expense ratio is only 0.18% and it pays a 1.4% dividend yield. The one issue is that the majority of stocks in the ETF are large or mega-caps, thus resulting in underexposure to the small-cap sector.
An ETF similar to XLK that also has heavy exposure to AAPL stock is the Vanguard Information Technology ETF (VGT). The ETF has over 400 stocks in its portfolio, much more than XLK, but the exposure to AAPL is 19%, nearly inline with XLK. Year-to-date VGT is lagging XLK by 2%, but is still putting together a great year with a gain so far of 20%.
While XLK and VGT give investors a large exposure to the fluctuations in AAPL stock, the iShares Dow Jones U.S. Technology Sector ETF (IYW) tops both of them. The ETF has one-fourth of their assets in the leading technology company. Strangely enough the ETF is the worst performer of the three technology ETFs with a gain of just under 20%. There is a total of 152 stocks in the portfolio, however the makeup outside of the top ten varies and therefore the performance is not quite as attractive. There is also the expense ratio of 0.47%, well above both XLK and VGT.
Apple Stock versus Technology ETF
When it comes down to the time of choosing between owning shares of AAPL or an ETF that owns AAPL the decision rides on risk tolerance. If you are able to withstand a 20% sell-off in an individual stock on bad news, then owning the stock is your choice. If that type of sell-off would ruin your week and your view on investing, then you must consider the ETF due to its diversification. Also keep in mind that even though the risk is lower for the ETF, so will be the reward potential. It all comes down to the reward-to-risk ratio you are comfortable with in your portfolio.