Another Edition of "What’s Better: Stock Or ETF?"

Published on Wednesday, 22 February 2012 20:55 Written by Todd Shriber

New York, February 22^nd (TradersHuddle.com) – This one is well-timed because on Wednesday February 22, CNBC addressed this very issue, and for better or worse, the anchor doing this segment basically led investors to believe an ETF’s best-performing stock is better than the fund overall. That’s fine as long as investors have the luck/skill of picking, but as we have proven with Energy Select Sector SPDR (NYSE: XLE) and the Materials Select Sector SPDR (NYSE: XLB), an ETF is often a better bet than a vast majority of its components.

Next up on the block: The Technology Select Sector SPDR. XLK’s top five holdings are Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), International Business Machines (NYSE: IBM), AT&T (NYSE: T) and Google (NASDAQ: GOOG). That quintet represents about 45% of XLK’s overall weight.

It’s not going to surprise anyone that of those five stocks and XLK that Apple is easily the best year-to-date performer. It’s also the best performer over the past year, past two years and past five years. So let’s see who’s fighting for the other medal positions. Year-to-date, XLK is right in the middle of the pack. It has only been topped by Apple and Microsoft. To the ETF’s credit, it has handily outpaced AT&T, IBM and Google.

Over the past year, XLK dips to fourth place as IBM passes it for third place. Over the past two years, XLK reclaims third place behind Apple and IBM and over the past five years XLK is relegated to fourth place behind Apple, IBM and Google.

The problem with XLK is one that is found over and over again these days with tech ETFs. Apple skews the returns of the ETFs. Granted, it’s for the better, but consider this: As of the market close on February 17, the IT sector was up 9.81% from the S&P 500 October 2007 market high. Take out Apple and the IT sector as represented by XLK was down 4.1%, according to MarketWatch. That’s not good.

Along those same lines, being long XLK brings up another familiar point tech investors have to deal with. Clearly, Apple is the most compelling large-cap name in the tech space, but at over $510 a share, the stock is cost-prohibitive to most investors. That leaves ETFs with large weights to Apple, of which XLK is one, as perhaps the next best option for getting exposure to the high-flying stock.

At the end of the day, there’s no such thing as a perfect ETF and if Apple gains another 20%, 30%, 50% or more from current levels no ETF that is 100% allocated to Apple is likely to outperform the stock. XLK does it job though. It gets investors into the Apple game while outperforming plenty of its other marquee constituents.