International Business Machines Corp. (IBM), the largest
computer-services provider, has a long track record of beating or
at least meeting the Street’s expectation for earnings. But in the
first quarter, the company missed its earnings mark for the first
time since 2005. T
he company also missed on the top line, in a quarterly
performance that is sure to add to growing concerns about the
market and the economy. IBM saw EPS of $3.00, which missed the
Zacks Consensus Estimate by 6 cents per share. Revenues were also
disappointing, with a year-ago decline of 5.1% and sequential
downfall of 20.1%.
The lackluster performance was due to a hardware slump and
failure to close large deals. Further, the weakness in the Japanese
yen added to the woes as the falling yen translated into fewer
dollars in sales in Japan (read: Japanese Yen ETF Investing
101).
Overall, this miss was rare and shocking, and has come as a blow
to the company’s stock price. IBM was down in double digits after
the announcement of the first quarter results.
Though the first quarter was among the weakest in the company’s
recent history, the outlook for IBM remains positive for the long
run. The company expects to benefit from investments in growth
initiatives and is focusing on growing its software business, which
is considered more profitable than hardware.
Quite predictably, this led to mixed reactions in many
technology ETFs. While the miss crushed some ETFs, the optimism
surrounding its growth led to fast recovery. This has been true in
particular for those funds that have major holdings in IBM, and
those that have a big focus on large caps in general (read: Is the
Tech ETF Signaling Trouble Ahead?).
Given this, we have highlighted three of the biggest holders of
IBM stock in ETF form and how they have held up in light of its
terrible earnings report:
iShares Dow Jones US Technology ETF (IYW)
This is by far one of the largest and popular funds in the
technology space having an impressive asset base of $1.8 billion.
This fund tracks the Dow Jones US Technology index, holding 136
stocks in its basket while charging investors a higher fee of 46
bps a year.
Of the major holdings, IBM takes the fourth position in the
portfolio, making up 8.45% of assets. The product is heavily skewed
towards the technology hardware and equipment segments, as these
make up for more than half of the portfolio. Software and computer
services take the remaining portion in the basket.
Following the announcement, the fund finished the day down about
1.4% and has not been able to recover fully as the ETF is up just
0.49% year-to-date. IYW currently has a Zacks ETF Rank of #4 or
‘Sell’ with a high risk outlook, suggesting the fund will
underperform its counterparts over the long haul (see more ETFs in
the Zacks ETF Center).
First Trust NASDAQ Technology Dividend Index Fund
(TDIV)
This is one of the latest additions to the tech ETF space,
focusing on technology companies that pay out dividends. This is
done by tracking the NASDAQ Technology Dividend Index which is a
broad benchmark of tech and telecom firms (weighted 80/20 in favor
of tech) that have a yield of at least 0.5% and have not decreased
dividends in the past one year.
In total, the fund holds about 79 securities in its basket. Of
these firms, IBM takes the fourth spot, making up roughly 7.57% of
the assets. From a sector perspective, semiconductors &
semiconductor equipment takes the largest share of 22.54%, closely
followed by computers & peripherals (14.10%) and diversified
telecommunication services (13.48%).
Due to its exposure, TDIV has not fallen much with just 0.4%
decline on the day of the IBM’s earnings release (read: Three Tech
ETFs Still Going Strong). The ETF is unpopular but it outpaced the
popular IYW, adding 9.32% in the year-to-date timeframe. This is a
high cost product in the tech space with AUM of $84.4 million.
iShares S&P Goldman Sachs Technology Index Fund
(IGM)
This ETF follows the S&P North American Technology Sector
Index and has amassed $486.3 million in its asset base. It holds
268 securities in total while charging 48 bps in fees and
expense.
IBM takes the fourth position in the basket with 6.93% of the
assets. All sectors make up for nice mix in the portfolio with
software taking the top spot while IT services, computer &
peripherals, and Internet software & services rounded off to
the next three spots.
In terms of performance, IGM slumped roughly 1.4% on the day of
IBM’s results but easily got rid out of the decline in the three
trading sessions. The fund is up 5.26% year-to-date. The ETF
currently has a Zacks ETF Rank of #2 or ‘Buy’ with medium risk
outlook, suggesting that this product is expected to perform well
over the long haul, when compared to the other funds in the
sector.
Bottom Line
The performances of the tech ETFs are not tied to IBM alone but
are largely dependent on the earnings of a few giants like Apple
(AAPL), Google (GOOG), Microsoft (MSFT), Oracle (ORCL) and IBM on a
combined basis.
![](http://staticzacks.net/images/zacks/blogs/1366900662_scaled_425.jpg)
Currently, many tech firms are seeing weak overseas demand,
overall reduction in global information technology spending, and a
strong dollar just to name a few headwinds to global tech
stocks.
However, the technology sector is clearly a long-term growth
prospect for investors willing to wait out short term volatility.
The sector should return to their market dominance over time,
especially as the cloud computing and mobility segments grow in
importance and offer up new avenues for growth in the sector.
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INTL BUS MACH (IBM): Free Stock Analysis Report
ISHARS-SP TECH (IGM): ETF Research Reports
ISHARS-DJ TECH (IYW): ETF Research Reports
FT-NDQ TECH DIF (TDIV): ETF Research Reports
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