FXL: March Technology Sector Dashboard (NYSEARCA:FXL)

This monthly article series presents a dashboard with aggregate industry metrics in information technology. It can also serve as a top-down analysis of sector ETFs such as the Technology Select Sector SPDR Fund ETF (XLK) or First Trust. Technology AlphaDEX® Fund ETF (NYSEARCA:FXL), whose holdings are used to calculate these metrics.

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The next two italicized paragraphs describe the dashboard methodology. These are necessary for new readers to understand the metrics. If you are familiar with this series or don't have time, you can skip to the chart.

Basic indicators

We calculate the median of five basic ratios for each industry: Earnings Yield (“EY”), Revenue from Sales (“SY”), Free Cash Flow Yield (“FY”), and Return on Equity (“ROE”). , and Gross Margin (“GM”). The reference universe includes large companies in the US stock market. The five basic metrics are calculated based on the past 12 months.For all of them, the higher Are better. EY, SY, FY are the median values ​​of the inverse of price/earnings, price/sales, and price/free cash flow. These are better suited for statistical studies than price-to-something ratios. A price-to-something ratio cannot or cannot be used when “something” is close to zero or negative (for example, a company with negative revenue). We also look at his two momentum metrics for each group: Median Monthly Return (RetM) and Median Annual Return (RetY).

I prefer the median to the average because the median divides the set into a good half and a bad half. Capital-weighted averages are skewed by extreme values ​​and by the largest companies. My indicators are designed for stock selection, not index investing.

Value and quality score

Calculates historical baselines for all metrics. They are expressed as EYh, SYh, FYh, ROEh, and GMh, respectively, and are calculated as average values ​​over an 11-year retrospective period. For example, his EYh value for hardware in the table below is his 11-year average of the median revenue of hardware companies.

Value Score (“VS”) is defined as the average difference (%) between the three rating ratios (EY, SY, FY) and their baseline (EYh, SYh, FYh). Similarly, a quality score (“QS”) is the average difference between two quality ratios (ROE, GM) and their baseline (ROEh, GMh).

Scores are displayed in percentage points. VS can be interpreted as the percentage underestimation or overestimation relative to the baseline (positive is good, negative is bad). This interpretation requires caution. The baseline is an arbitrary reference value and not an assumed fair value. This formula assumes that the three metrics have equal importance.

Current data

The following table shows the metrics and scores at the time of writing. Columns represent all the data named and defined above.

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value and quality graph

The following graph plots value scores and quality scores by industry (higher is better).

Evolution from last month

Value scores improved slightly in communications equipment, but worsened in other industries. Quality scores improved slightly for software but worsened for hardware and semiconductors.

momentum

The following graph plots momentum scores based on median returns.

interpretation

According to my S&P 500 monthly dashboard, the entire IT sector is overvalued by about 30% compared to the 11-year average. Nevertheless, the level of overvaluation varies by subsector, ranging from less than 15% in communications equipment and electronics to more than 25% in other industries. Quality may partially offset overestimation for telecommunications equipment and to a lesser extent for software and IT services. Hardware is the least attractive subsector, with both value and quality scores well below historical norms.

Overview about FXL

The First Trust Technology AlphaDEX® Fund ETF began trading on May 8, 2007 and tracks StrataQuant.^® Technology index. It holds 97 stocks and has an expense ratio of 0.62%, while XLK's commission is 0.09%.

First Trust explains that the index starts with the Russell 1000 Index. Constituents are given growth and value scores based on quantitative factors. Each company has only one score (Growth or Value) based on the style designations given by Russell. Stocks in the technology sector are then ranked according to their scores. The greater of the top 75% or 40 stocks is selected for the fund's underlying index. Constituents are divided into quintiles, with higher weights being given to higher quintiles. Stocks are equally weighted within each quintile. The index is reconstituted quarterly. In summary, FXL selects and overweights stocks that look attractive relative to their peers in terms of value or growth.

The following table shows the top 10 stocks, their weights and some fundamental ratios. Together they account for 20.8% of the asset value, with the largest position having a weight of 2.66%. Therefore, the portfolio is well-diversified and has more exposure to individual companies than a capital-weighted ETF like XLK, where Apple Inc. (AAPL) and Microsoft Corp. (MSFT) together account for over 40% of the asset value. The risks involved are much lower.

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Data calculated with Portfolio123

Since its inception, FXL has underperformed XLK and slightly lagged the Invesco S&P 500® Equal Weight Technology ETF (RSPT).

FXL has also lagged both benchmarks over the past 12 months.

In summary, FXL is a well-diversified technology ETF that favors stocks with either growth or value characteristics. The idea looks great for investors who want to avoid the concentration in the giant stocks of popular technology ETFs like XLK. Nevertheless, this strategy has not been able to deliver excess returns since 2007.

dashboard list

Use the first table to calculate value and quality scores. It may also be used in the stock selection process to check how a company stands among its peers. For example, the EY column shows that IT services companies with an Earnings Yield greater than 0.0322 (or a Price Earnings Ratio less than 31.06) are in the top half of their industry on this metric. Quantitative Risk and Value subscribers will receive a dashboard list monthly, showing them the most profitable companies that rank in the top half of their peers with respect to three metrics: The stocks below are part of a list sent to subscribers a few weeks ago based on currently available data.

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This is a rotation model that statistically biases long-term excess returns rather than the analysis results of each stock.