Technology stocks are once again leading the way in 2024. Why these ETFs tell a different story. (2024)

By Isabel Wang

Some Select Sector SPDR ETFs have failed to reflect the stock-market's movement this year

U.S. stocks are on a seemingly relentless upward trajectory with robust gains from megacap technology companies propelling the S&P 500 to multiple all-time highs this year. Some of the most popular ETFs that track those stock sectors haven't kept pace, leading to significant gaps between their returns and the indexes they are designed to mirror.

While the S&P 500 communication-services sector XX:SP500.50 was the top performer among the 11 sectors of the large-cap benchmark index so far in 2024, the Communication Services Select Sector SPDR Fund XLC has lagged behind the index it tracks by 7.1 percentage points, according to FactSet data.

Similarly, the Technology Select Sector SPDR Fund XLK has underperformed the S&P 500 information-technology sector XX:SP500.45 by 4.7 percentage points this year. The Consumer Discretionary Select Sector SPDR Fund XLY has fallen behind its tracked index XX:SP500.25 by 2.7 percentage points over the same period, according to FactSet data.

As a result, the Utilities Select Sector SPDR Fund XLU, aligned with its sector index's remarkable resurgence in recent months, has outperformed all the other SPDR sector ETFs in 2024, according to FactSet data (see table below).

 S&P 500 Sector Sector Index Performance Select Sector SPDR ETF Performance YTD Difference Communication Services 20.8 13.7 7.1 Information Technology 14.7 10.0 4.7 Utilities 13.6 14.2 -0.6 Financials 12.5 13.0 -0.5 Energy 12.8 13.3 -0.5 Industrials 9.8 9.9 -0.1 Consumer Staples 9.5 8.6 0.9 Materials 7.4 7.7 -0.3 Healthcare 7.1 7.3 -0.2 Consumer Discretionary 2.6 -0.1 2.7 Real Estate -3.5 -3.2 -0.3 Source: FactSet data through Friday, May 17. 

What happened

Typically, there's little difference between the S&P 500 SPX sector index performance and the ETFs tracking these benchmarks. However, this year, some of the Select Sector SPDR ETFs have failed to accurately reflect the market's movement.

"It's not that State Street dropped the ball - their ETFs did exactly what they are designed to do and they've tracked their benchmarks admirably. The problem is that their benchmarks aren't what most people think they are," said Austin Harrison, market strategist at Grindstone Intelligence.

Different from the uninvestible cap-weighted S&P 500 sector indexes in which each company is weighted according to the size of its market capitalization, some of the passively managed sector ETFs use what's called a modified market-cap weighting.

What "modified" means, in effect, is that fund managers cap the weight of individual constituents, limiting the influence of the largest companies.

That prevents a fund from breaching the U.S. regulated investment company's asset diversification requirements by ensuring no single constituent has a weight exceeding 25%, while the sum of the companies with weights over 5% should not claim a combined allocation greater than 50%, said Matthew Bartolini, managing director at State Street Global Advisors and head of SPDR Americas Research.

The caps are set to allow for a buffer below the 5% limit.

Alphabet Inc.'s Class A (GOOGL) and Class C (GOOG) shares currently constitute about 46% of the market capitalization of the S&P 500 communication-services sector, yet they account for only 26% of XLC. Shares of Meta Platforms (META) make up about 26% of the sector index's market cap, but they account for only 22% of the ETF, according to FactSet data.

As a result, the sizable reductions saw the combined weighting of the two "Magnificent Seven" stocks chopped to 48% from 72%, while leaving little room for any other company in XLC to exceed a 5% weighting without violating the 50%-cap rule.

"It [the tracking difference] hasn't been as prevalent of a problem in recent years because there wasn't as much concentration in the stock market as there is over the last 18 months," Harrison told MarketWatch via phone on Wednesday, adding that the modified market-cap weighting has become an actual problem for funds because they are starting to underweight some of the best performing stocks in the sector.

See: Why S&P 500's consumer-discretionary sector is 'left behind' in U.S. stock market

Bartolini said the rules are in place from a regulatory standpoint to ensure diversification for a swath of ETFs.

"If investors want to own a specific stock sector without having to individually buy every single stock themselves, maintaining that exposure and trading it, which would be costly and time-consuming, this [investing in sector ETFs] is the way you need to do it," he told MarketWatch via phone on Thursday, adding that it has been "beneficial" to investors over a long period.

Utility stocks offer a different tale

To be sure, shares of megacap tech companies have started to make room for other stocks on their way up, which some investors think is a sign of a healthier market that's less dependent on the performance of a few big names. The rally in tech sectors is now expanding into areas like utilities, industrials and even small-cap stocks in 2024.

The Utilities Select Sector SPDR Fund was up over 14% year to date in a big reversal from 2023. The Federal Reserve's lower interest-rate outlook and increased demand for electricity from artificial intelligence has made the traditional defensive corner of the market attractive, according to Brian Mulberry, client portfolio manager at Zacks Investment Management.

Remarkably, three of the five best-performing names in the S&P 500 this year to date are from the utilities sector. One of the newest members to the S&P 500 index, electric utility firm Vistra Corp.(VST), has outperformed Nvidia Corp.'s (NVDA) 87% gain this year, up 144%, according to FactSet data.

Constellation Energy Corp. (CEG), the biggest nuclear-power operator in the U.S., has advanced over 82% so far in 2024, according to FactSet data. Constellation accounts for only 6.5% of the Utilities Select Sector SPDR Fund.

"I think investors are seeing utilities as a way that they can invest in AI at a price-to-earnings ratio [P/E] of around 17 and get a 3-4% dividend yield...without having to buy Nvidia at an over 70 P/E ratio," Mulberry told MarketWatch on Wednesday.

"It's [utility sector] a very durable source of earnings, even though the electricity demand softens from (AI-related) data centers, it is still growing for electric vehicles and lots of other places, so the power generation will be used wherever it comes from," he added.

U.S. stocks finished mostly higher on Friday with the Dow Jones Industrial Average DJIA ending above the 40,000 threshold for the first time ever. The S&P 500 and the Nasdaq Composite COMP notched their fourth straight week of gains, up 1.5% and 2.1%, respectively, according to FactSet data.

-Isabel Wang

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

 

(END) Dow Jones Newswires

05-20-24 0854ET

Copyright (c) 2024 Dow Jones & Company, Inc.

Technology stocks are once again leading the way in 2024. Why these ETFs tell a different story. (2024)

FAQs

Technology stocks are once again leading the way in 2024. Why these ETFs tell a different story.? ›

Why these ETFs tell a different story. U.S. stocks are on a seemingly relentless upward trajectory with robust gains from megacap technology companies propelling the S&P 500 to multiple all-time highs this year.

What tech stocks to buy in 2024? ›

Best tech stocks as of June 2024
Company and ticker symbolPerformance in 2024
Micron (MU)46.5%
Western Digital (WDC)43.8%
Qualcomm (QCOM)41.1%
NetApp (NTAP)36.6%
6 more rows

What is the best technology ETF? ›

Here are the best Technology funds
  • Technology Select Sector SPDR® ETF.
  • Invesco PHLX Semiconductor ETF.
  • Vanguard Information Technology ETF.
  • SPDR® S&P Software & Services ETF.
  • Invesco S&P 500® Equal Weight Tech ETF.
  • Fidelity MSCI Information Tech ETF.
  • First Trust NASDAQ-100-Tech Sector ETF.

Why invest in technology stocks? ›

The tech industry has a reputation for delivering consistent gains over many years, making it an excellent place to start whether you're new to the stock market or a seasoned investor looking for new opportunities.

How does technology affect the securities market? ›

Overall, technology has a profound impact on the stock market. It has transformed the way stocks are traded. Technology has made the stock market more accessible, efficient, and data-driven, which has led to increased liquidity and improved investment opportunities for investors.

Which stock will boom in 2024? ›

Top Long Term Stocks to Buy in 2024 Based on 5Y Avg Net Profit Margin
Stock NameSub-SectorShare Price
HDFC Bank LtdPrivate Banks₹1,514.85
Kotak Mahindra Bank LtdPrivate Banks₹1,690.10
Tata Consultancy Services LtdIT Services & Consulting₹3,736.10
Eicher Motors LtdTrucks & Buses₹4,742.95
6 more rows
3 days ago

What will be the advanced technology in 2024? ›

Five tech trends for 2024
  • Artificial intelligence. AI is about machines with human attributes - speaking, reading, seeing and even recognising emotion - completing tasks while also "learning" from repeated interactions. ...
  • Augmented reality. ...
  • Blockchain. ...
  • Automation. ...
  • Internet of Things.

What are the best ETFs for 2024? ›

The Best 50 Indices for ETFs in 2024
Investment focus Indexin 20241 Year
Cryptocurrencies Vinter 21Shares Crypto Basket Equal Weight+42.87%+93.49%
Equity Turkey MSCI Turkey+42.61%+54.87%
Cryptocurrencies Uniswap+41.79%+102.13%
Cryptocurrencies MSCI Global Digital Assets Select Top 20 Capped+38.96%+108.24%
46 more rows

What is the number 1 ETF to buy? ›

Top U.S. market-cap index ETFs
Fund (ticker)YTD performance5-year performance
Vanguard S&P 500 ETF (VOO)11.1 percent15.5 percent
SPDR S&P 500 ETF Trust (SPY)11.0 percent15.4 percent
iShares Core S&P 500 ETF (IVV)10.3 percent15.3 percent
Invesco QQQ Trust (QQQ)11.6 percent21.8 percent

Is now a good time to buy VGT? ›

Currently there's no upside potential for VGT, based on the analysts' average price target. Is VGT a Buy, Sell or Hold? VGT has a consensus rating of Moderate Buy which is based on 234 buy ratings, 76 hold ratings and 5 sell ratings.

Is it worth buying tech stocks? ›

Tech stocks may not necessarily offer the most attractive values in today's market, but for companies that can continue to generate revenue and earnings growth, stocks may continue to have upside potential. Be sure to consult with your financial professional.

What are the best technology stocks to invest in? ›

Best-performing tech stocks
TickerCompanyPerformance (Year)
CRWDCrowdstrike Holdings Inc95.88%
MUMicron Technology Inc.83.28%
QCOMQualcomm, Inc.79.92%
KLACKLA Corp.71.46%
3 more rows

Is it good to invest in technology sector? ›

Why Tech Stocks Spark Interest. High Growth Potential: Companies at the forefront of technology, such as AI and digital platforms, promise significant returns. These entities not only capitalise on the digital era's expansion but also offer investors a share in the tech revolution's profits.

How technology is changing the stock market? ›

The use of technology has made the financial markets more transparent, allowing investors to access data and insights that were previously unavailable. Through data analytics, investors can identify market trends, uncover hidden opportunities and assess the performance of their portfolios in real time.

How technology affects the investors? ›

With the introduction of the Internet, more people have access to investing opportunities and have a higher level of financial understanding. New investors can now boost their success rates thanks to technological advancements in the industry, which have greatly aided the expansion of the sector.

How has technology improved stock control? ›

Today, technology makes things easier with inventory management software. The key features of inventory management system help you manage, organize, and track material purchases, product sales, and other inventory processes. Gone are the days when stock control was done manually.

What is the best tech stock to invest in? ›

Best-performing tech stocks
TickerCompanyPerformance (Year)
CRWDCrowdstrike Holdings Inc95.88%
MUMicron Technology Inc.83.28%
QCOMQualcomm, Inc.79.92%
KLACKLA Corp.71.46%
3 more rows
3 days ago

Should I buy Nvidia right now? ›

Key Points. Nvidia announced a 10-for-1 stock split during its first-quarter earnings report. Since its last split in July 2021, Nvidia stock has returned over 450%. Valuation analysis and historical returns suggest that now is the optimal time to scoop up shares.

What is the best AI stock to buy now? ›

7 best-performing AI stocks
TickerCompanyPerformance (Year)
NVDANVIDIA Corp183.06%
AVAVAeroVironment Inc.118.35%
PRCTProcept BioRobotics Corp106.78%
HLXHelix Energy Solutions Group Inc76.36%
3 more rows
4 days ago

Is CrowdStrike a buy? ›

CrowdStrike carries a Zacks Rank #2 (Buy) and has a Growth Score of A at present.

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