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Summary XT invests in companies developing or using exponential technologies. XT owns many large companies that only have a small exposure to these technologies. Due to blue chip holdings, XT is not as volatile as one might expect from the name, good for conservative investors, but may disappoint those seeking pure plays. The iShares Exponential Technology ETF (NYSEARCA: XT ) seeks to replicate the overall performance, before fees, of the benchmark Morningstar Exponential Technologies Index. This index is comprised of stocks issued by developed and emerging market companies that create and use exponential technologies. Exponential technologies are those which lead to exponential growth, creating entirely new markets where none existed only years before. Most of the companies in this fund use rather than create exponential technologies, which are much rarer. Take a company such as Netflix (NASDAQ: NFLX ), the top holding with 1.22 percent of assets. Netflix uses Internet technology and is riding a wave of technological change, but Netflix didn’t create the technology behind it. Index & Strategy Following the underlying benchmark, XT invests in developed and emerging market companies involved in nine different fields, or themes, which fund managers deem to be “exponential technologies.” These innovative technologies are replacing outdated systems and methodologies. The areas include big data and analytics, bioinformatics, energy and environmental systems, financial services innovation, medicine and neuroscience as well as nanotechnology, networking, robotics and 3-D printing. XT invests at least 80 percent of its assets in securities found in the underlying index. While the fund provides solid exposure to up-and-coming technology companies, such as Illumina (NASDAQ: ILMN ), Splunk (NASDAQ: SPLK ) and Hologic (NASDAQ: HOLX ), it also holds well-established blue chip companies like Airbus (OTCPK: EADSY ), AT&T (NYSE: T ), Boeing (NYSE: BA ), DuPont (NYSE: DD ), Monsanto (NYSE: MON ) and Pfizer (NYSE: PFE ). Those latter firms are unlikely to experience exponential stock price increases because they’re already large blue chip companies. The former firms are more dynamic pure plays on emerging technologies. Illumina develops, manufactures and markets integrated systems that serve the gene expression, sequencing and genotyping industry. Splunk creates software that searches, monitors and analyzes machine-generated big data. Top 10 holding Hologic develops and supplies diagnostic imaging systems related to women’s health. The mix of holdings in XT offers investors the opportunity diversify their portfolios with growth stocks across a wide range of technologies, market caps and geographic locations, but without taking on as much risk as one might expect (and for aggressive investors, want) from a fund with the name “exponential technology.” Index components are scored across individual analysts, sectors and themes. Managers review the scores and collectively select leading candidates for inclusion in the index. Each theme will have one to five leaders. The index is reconstituted annually. At that time, potential candidates for inclusion must have average 3-month trailing daily trading volume in excess of $2 million and a market cap of more than $300 million. Stocks already in the index must have maintained an average 3-month trading volume over $1.5 million and a market cap greater than $200 million. Stocks not meeting these criteria are eliminated from consideration. The remaining qualified candidates are ranked in order of their exposure to exponential technology themes. Managers rank the stocks using specific criteria, such as the number of themes in which the stock is a leader. They also consider the number of themes in which it scores above average and market capitalization with a preference for smaller firms over shares of larger cap names. The 200 highest scoring stocks are included in the index. The ETF’s managers then select and equally weight shares from this index to create the fund’s portfolio. Thus, while XT is technically not an actively managed fund, the selection of components is made by somewhat subjective measures. Portfolio Composition and Holdings XT is a large core growth fund with slightly more than $686 million in assets allocated across 195 individual holdings. The portfolio holds 67 percent of asset in domestic stocks and 31 percent in foreign shares. The fund’s foreign exposure includes Developed and Emerging Europe as well as Developed and Emerging Asia. In addition to the United States, the fund is invested in companies headquartered in the United Kingdom, France, Switzerland and Denmark as well as Canada, Japan, Australia and India. XT holds 27 percent of assets in giant cap stocks along with 40 percent in large caps, 28 percent in mid-cap stocks and 5 percent in small caps. The fund also has a small exposure to micro-cap shares. Compared to the category averages, the ETF is underweight giant caps and overweight large- and mid-cap stocks. XT is heavily weighted towards the technology, health care and telecommunication sectors. The fund’s top 10 holdings comprise 7.9 percent of total assets. These include Netflix , Valeant Pharmaceuticals (NYSE: VRX ), Amazon (NASDAQ: AMZN ), and Seattle Genetics (NASDAQ: SGEN ). While there are many large caps in the portfolio, XT has an average market capitalization of $23.3 billion, which is less than the technology category averages of $40.8 billion. XT shares have a P/E ratio of 20.94 and a price-to-book 2.72. Historical Performance Established in March 2015, XT has generated a 3-month return of 0.26 percent. This compares to the category average of -2.26 percent over the same period. XT has underperformed the Technology Select Sector SPDR ETF (NYSEARCA: XLK ) since inception in March 2015. (click to enlarge) Expenses The fund has a total expense ratio of 0.47 percent, which is less than the category average of 0.57 percent. Dividends Thanks to owning many large blue chips, the fund does pay a dividend. The current 30-day SEC yield is 1.36 percent. Outlook The iShares Exponential Technology Fund provides investors with the opportunity to gain exposure to a niche area of the thriving technology sector. XT is a relatively conservative way to play these companies due to the inclusion of blue chip companies across a range of sectors. Although the fund is equally weighted, its smaller cap components should experience larger gains over the long run. The approach of XT is good for conservative investors if it is successful, but may disappoint aggressive investors looking for pure exposure to innovative, cutting-edge technology companies. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Scalper1 News
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