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Carrying Apple in the ETF Basket

Stocks in this article: AAPL IYW XLK VGT

NEW YORK (TheStreet) -- A client recently asked why Apple (AAPL) was not in the portfolio. That presented a good opportunity to explain the role that sector ETFs play in a diversified portfolio, how what is under the hood of any ETF is very important and that the client does indeed own Apple by virtue of its large weighting in the tech sector ETF in his portfolio.

Just about every large ETF provider has a broad tech sector ETF and Apple is the largest holding by far in all of them. In the iShares DJ US Technology Sector Index Fund (IYW) Apple currently has a 22.7% weight. In the Technology Select Sector SPDR (XLK) Apple has a 19.7% weighting and in the Vanguard Information Technology ETF (VGT) it has a 14.5% weight.


The huge weighting in one stock, in this case Apple, is neither bad nor good. It simply reflects the fact that Apple has by far the largest market capitalization. The huge weighting does require having some sort of opinion on Apple; it would make no sense to own any of these ETFs while at the same time believing Apple was destined to go out of business quickly.

First You Screw Up, Then Lie and Finally Die

The technology sector currently comprises 20% of the S&P 500. An investor who benchmarks to the S&P 500 might reasonably allocate 18% to 22% to tech. Keeping the example simple, a 20% allocation to IYW would result in a 4.5% portfolio weight in Apple, a 20% weight in XLK would result in a 3.9% weight in Apple and a similar exposure to VGT would put 2.9% of the portfolio in Apple.

In the mutual fund industry a so-called concentrated portfolio has 30 to 40 holdings which implies an average weighting for each stock of 2.5% to 3.3%, so the exposure to Apple available in the sector ETFs is substantial and the performance of the three sector ETFs reflects that fact.

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Year to date, IYW is up 21%, XLK is up 18.5% and VGT is up 20% compared to an 11% gain for the S&P 500. Obviously all three funds have benefitted from the 56% gain in Apple. The reason for the lag in XLK is that this fund actually combines the tech sector and the telecom sector and telco stocks have generally lagged the rally in the broad market this year.

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