PTF ETF: Technology Dashboard For January

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This monthly article series shows a dashboard with aggregate industry metrics in technology and communication services. It may also serve as a top-down analysis of sector ETFs like Vanguard Information Technology Index ETF (VGT), Technology Select Sector SPDR ETF (XLK) and iShares U.S. Technology ETF (IYW), whose largest holdings are used to calculate these metrics. This month’s article will focus on Invesco Dorsey Wright Technology Momentum ETF (NASDAQ:PTF).

Shortcut

The next two paragraphs in italic describe the dashboard methodology. They are necessary for new readers to understand the metrics. If you are used to this series or if you are short of time, you can skip them and go to the charts.

Base Metrics

I calculate the median value of five fundamental ratios for each industry: Earnings Yield (“EY”), Sales Yield (“SY”), Free Cash Flow Yield (“FY”), Return on Equity (“ROE”), Gross Margin (“GM”). The reference universe includes large companies in the U.S. stock market. The five base metrics are calculated on trailing 12 months. For all of them, higher is better. EY, SY and FY are medians of the inverse of Price/Earnings, Price/Sales and Price/Free Cash Flow. They are better for statistical studies than price-to-something ratios, which are unusable or non available when the “something” is close to zero or negative (for example, companies with negative earnings). I also look at two momentum metrics for each group: the median monthly return (RetM) and the median annual return (RetY).

I prefer medians to averages because a median splits a set in a good half and a bad half. A capital-weighted average is skewed by extreme values and the largest companies. My metrics are designed for stock-picking rather than index investing.

Value and Quality Scores

I calculate historical baselines for all metrics. They are noted respectively EYh, SYh, FYh, ROEh, GMh, and they are calculated as the averages on a look-back period of 11 years. For example, the value of EYh for hardware in the table below is the 11-year average of the median Earnings Yield in hardware companies.

The Value Score (“VS”) is defined as the average difference in % between the three valuation ratios (EY, SY, FY) and their baselines (EYh, SYh, FYh). The same way, the Quality Score (“QS”) is the average difference between the two quality ratios (ROE, GM) and their baselines (ROEh, GMh).

The scores are in percentage points. VS may be interpreted as the percentage of undervaluation or overvaluation relative to the baseline (positive is good, negative is bad). This interpretation must be taken with caution: the baseline is an arbitrary reference, not a supposed fair value. The formula assumes that the three valuation metrics are of equal importance.

Current data

The next table shows the metrics and scores as of last week’s closing. Columns stand for all the data named and defined above.

	VS	QS	EY	SY	FY	ROE	GM	EYh	SYh	FYh	ROEh	GMh	RetM	RetY
Hardware	-11.54	-10.42	0.0319	0.7016	0.0376	6.29	33.00	0.0349	0.9626	0.0372	6.38	40.98	1.02%	37.79%
Comm. Equip.	-9.52	8.51	0.0313	0.2821	0.0257	19.72	60.56	0.0313	0.2695	0.0385	16.32	62.96	4.06%	-14.69%
Electronic Equip.	3.94	-7.27	0.0393	0.7538	0.0448	17.03	20.14	0.0405	0.7659	0.0385	13.29	35.11	1.04%	2.16%
Software	-26.50	9.37	0.0221	0.1047	0.0227	22.14	82.18	0.0252	0.1595	0.0338	18.02	85.70	2.70%	23.01%
Semiconductors	-23.57	16.24	0.0387	0.1785	0.0211	33.87	58.92	0.0444	0.2294	0.0328	24.52	62.43	-0.80%	8.02%
IT Services	-29.19	12.00	0.0339	0.1719	0.0199	31.80	58.31	0.0368	0.3063	0.0310	26.89	55.15	1.26%	4.88%

Value And Quality chart

The next chart plots the Value and Quality Scores by industries (higher is better).

Value and quality in technology (Chart: author; data: Portfolio123)

Evolution since last month

Valuation has deteriorated in hardware, software and semiconductors, whereas it has improved a bit in IT services.

Score variations (Chart: author; data: Portfolio123)

Momentum

The next chart plots momentum scores based on median returns.

Interpretation

According to my monthly S&P 500 dashboard, information technology is the most overvalued GICS sector. However, the electronic equipment industry is quite close to 11-year averages regarding both valuation and quality. Hardware and communication equipment are moderately overvalued (between 9% to 12% using the same metrics). Other subsectors are overvalued by 23% to 29% relative to their historical baselines. Overvaluation may be partly justified by good quality scores for communication equipment, semiconductors, and to a lesser extent for the software industry and IT services.

Focus on PTF

Invesco Dorsey Wright Technology Momentum ETF started investing operations on 10/12/2006 and tracks the Dorsey Wright Technology Technical Leaders Index. It has 40 holdings and a total expense ratio of 0.71%. Capital-weighted technology ETFs like VGT and XLK have much cheaper fees (0.10%). The underlying index selects and weighs constituents using a score based on price relative strength, and it is rebalanced quarterly. The aggregate weight of the five largest holdings is capped at 25%.

The weights of subsectors may change over time depending on their relative momentum. The fund is overweight in software companies now (49% of asset value). The portfolio is quite concentrated: the top 10 holdings, listed below with fundamental ratios, weigh 42.6% in aggregate. The top 3 names are between 5% and 8%.

Ticker	Name	Weight%	EPS growth %TTM	P/E TTM	P/E fwd	Yield%
AAPL	Apple, Inc.	7.471	0.45	30.33	28.37	0.52
CDNS	Cadence Design Systems, Inc.	6.111	23.51	76.51	52.56	0
NVDA	NVIDIA Corp.	5.724	222.20	72.24	44.60	0.03
AFRM	Affirm Holdings, Inc.	3.655	-34.07	N/A	N/A	0
FICO	Fair Isaac Corp.	3.531	19.22	72.72	51.72	0
RMBS	Rambus, Inc.	3.37	1237.36	25.20	37.48	0
ANET	Arista Networks, Inc.	3.355	63.70	41.94	38.45	0
ONTO	Onto Innovation, Inc.	3.272	-22.05	45.30	39.46	0
AVGO	Broadcom Inc.	3.184	25.65	33.63	23.61	1.90
MSFT	Microsoft Corp.	2.926	11.28	37.62	34.59	0.77

PTF has underperformed XLK by about 4% in annualized return since inception. Moreover, its shows a significantly higher historical volatility.

	Total Return	Annual. Return	Drawdown	Sharpe	Volatility
PTF	478.62%	10.72%	-55.38%	0.52	23.32%
XLK	983.52%	14.82%	-53.04%	0.77	18.75%

The next charts show that performance has been underwhelming on 5-year and 12-month time frames.

PTF vs. XLK, 5-year return (Seeking Alpha)

PTF vs. XLK, 12-month return (Seeking Alpha)

However, PTF has sometimes outperformed during bullish periods, for example in 2020 and 2021. PTF doesn’t look attractive as a long-term investment, but it may be a good swing-trading instrument thanks to its high volatility.

Dashboard List

I use the first table to calculate value and quality scores. It may also be used in a stock-picking process to check how companies stand among their peers. For example, the EY column tells us that a semiconductor company with an Earnings Yield above 0.0387 (or price/earnings below 25.84) is in the better half of the industry regarding this metric. A Dashboard List is sent every month to subscribers with the most profitable companies standing in the better half among their peers regarding the three valuation metrics at the same time. The list below was sent to subscribers several weeks ago based on data available at this time.