There are plenty of questions about the technology sector this summer. Two important earnings reports, from Google and IBM, have come out so far and both were better than expectations. Apple reports later today, and the estimates are that the company will have another strong quarter.  So why are tech sector ETFs running into a bumpy patch? Of last week’s worst performing ETFs, four tech sector funds led the way: iShares PHLX SOX Semiconductor Sector (NASDAQ: SOXX), PowerShares Dynamic Networking (NYSE: PXQ), First Trust Technology AlphaDEX (NYSE: FXL), and iShares S&P North American Technology-Multimedia Networking Index Fund (NYSE: IGN).

At least one issue is exposure to Apple. None of these funds includes significant exposure to what has been the hottest stock going for the past couple of years. The PowerShares QQQ (NYSE: QQQ), in contrast, holds more than 12% of its assets in Apple stock. QQQ is up about 30% over the past 12 months and managed to fall by about -0.5% in the past week. SOXX lost -6.3% of its NAV last week and PXQ was down -6.09%. See “SOXX” chart below.

IGN holds nearly 9% of its assets in Cisco Systems, the largest holding of any ETF in the tech sector. PXQ holds about 4.5% of assets in Cisco and QQQ holds about 3.5%. Cisco has lost about -30% of its value in the past 12 months.

Exposure to semiconductor stocks is high in all these funds, which is perhaps why they track the Semiconductor HOLDRS (NYSE: SMH) so closely. Semiconductor sales are not expected to be robust this year, and general economic conditions indicate that consumer spending on new computer gear could fall even more. Sales are shifting to smartphones and, to some degree, tablets.

As we’ve noted elsewhere today, demand for tech products eventually comes down to consumer spending.  If a company does not sell something that fires up consumers, any gains are likely to be temporary.

Could there be some value lurking in these funds? Trailing P/E for all six ranges from 13 for SOXX and SMH to 26 for PXQ. It’s hard to say that any of the six is oversold, and PXQ looks to be overbought.

As consumer spending starts to slow, and business investment as well, the tech sector could have a couple of tough quarters ahead.

Paul Ausick

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