ETF Expert Corner

StateStreet’s Dave Mazza Spotlights Innovative Technology ETF

February 2nd, 2016 by ETF Store Staff

Dave Mazza, Head of Research for SPDR ETFs at StateStreet Global Advisors, spotlights the recently launched SPDR FactSet Innovative Technology ETF (XITK).



Transcript

You can listen to our interview with Dave Mazza by using the above media player or enjoy a full transcription of the interview below.

Nate Geraci: The ETF we're spotlighting this week is the SPDR FactSet Innovative Technology ETF. The ticker on that is XITK. This just launched about three weeks ago. Joining us via phone from Boston to discuss this ETF is Dave Mazza, Head of Research for SPDR ETFs at StateStreet Global Advisors. Dave, as always, a pleasure to have you on the program.

Dave Mazza: Nate, thanks for having me back today.

Nate Geraci: Dave, before we get to this new ETF, I know StateStreet has been focusing recently on developing more specialized ETFs. Certainly the ETF we're spotlighting today is an example of that. Is there anything in particular driving this focus? Is this just the natural next step in ETF innovation at StateStreet?

Dave Mazza: What we're seeing across the industry and in particular what we're focused on at StateStreet is looking to continue to innovate in a responsible way. A few areas of that is thinking about moving beyond traditional benchmarks. This is one of the areas why we've seen a growth in smart beta and semantic products. At the same time, also seeing investors interested in solution-oriented products. Whether that not be actively managed fixed incomes or multi-asset class type ETF of ETFs.

Nate Geraci: Is this in response to client-driven demand?

Dave Mazza: Yeah, this is coming from our clients. That's a big part of this, that clients as we know, continue to embrace ETFs due to the efficiency that they offer, the transparency, the liquidity, all the benefits that have existed now for over 20 plus years. Now, they're saying, "ETFs are really a solution in my portfolio, let me look to get access to different areas of the market that may not be currently served." We know this is a turbulent market environment, and it's actually likely to continue to be challenging going forward. Investors are really looking for tools to help navigate those choppy waters.

Nate Geraci: The ETF we're spotlighting today is the SPDR FactSet Innovative Technology ETF. Again, the ticker symbol is XITK. This seeks to own innovative companies within the tech space. As I understand it, the focus here is on companies with cutting-edge products and services that are showing strong revenue growth. Take us from there. How are the stocks in this ETF selected?

Dave Mazza: What we're looking to do here is to focus on innovation, across industries. The real idea here is seeking out companies by actually drilling into their revenues. Not necessarily just saying this is a technology company, or this is a financial services company. It uses a unique methodology that Sachs had developed, the index provider, to help seek out companies that are growing their revenues in disruptive industries and disruptive economies. Meaning that they actually have the ability to grow their earnings and revenues at a faster pace potentially, than the broader market.

Nate Geraci: Now, we know revenue growth is always a good thing, but why is that such an important screen here? Is it as simple as firms with strong revenue growth are more likely to have innovative products or disruptive business models?

Dave Mazza: It's really the idea of drilling down a step further. Most people think of ... We take for granted a sector industry, but actually, if you look into it, it can be much more difficult to ascertain whether or not a company of course is a technology company or a financial services company, because lines are getting blurred. If we start doing a bottoms-up analysis and saying, "Hey, is this company really doing something innovative? Really doing something unique, that going forward likely could be disruptive?" That's what we're looking to do here. Not just relying on traditional methodologies for choosing whether or not the company belongs in one particular industry or another.

Nate Geraci: I guess that brings up another question, because often times when I think about innovative technologies, certainly you have companies that may end up completely changing the game, but other times, it's possible that an earlier stage company may have an innovative technology that just doesn't resonate for whatever reason. It just doesn't end up disrupting the status quo. I guess the question I'm asking is, is there a way that this ETF attempts to avoid jumping on a company too early? Or I guess for that matter, jumping on too late?

Dave Mazza: Yeah, Nate, you're absolutely right. The big element here is diversification. This index and ETF have over 80 holdings and the idea being that we're just relying on one or two names to potentially drive performance. The other benefit is that we're modified ...

Nate Geraci: Sounds like we may have lost Dave there. Hopefully we can get him back on the line. Conor, you know it's interesting. As you look at this ETF, and I'm going to ask Dave about some of the specific holdings within the ETF. This doesn't just hold some of the big names that you might expect within the tech space, the Facebooks, the Netflix, the Googles. There are companies from really across a number of different innovative industries. You start looking at places like cyber securities, smart phones, electronic media, it's pretty interesting. I think we have Dave back on the line. Dave, are you back with us?

Dave Mazza: Yes.

Nate Geraci: Dave, I was talking to Connor, I know many of our listeners, when they think of innovative technologies and social media. Companies like Facebook and Netflix and Google or Alphabet come to mind. This ETF goes beyond just those companies. Can you tell us about some of the other companies investors might find in this ETF? What other types of products or services?

Dave Mazza: What we're really, again looking for is just rely on one particular name. It's basically saying, "What are companies doing within the smart phone industry? What are companies doing within tablets? What are companies doing to help drive other companies across industries, to help grow their own revenues?" Meaning, looking at technologies in a much broader setting and not necessarily thinking of them simply as this one particular company doing something that's really unique right now. This ETF is intended to grow as industries grow, again because we're doing a bottoms-up analysis of revenues.

Nate Geraci: Again, we're visiting with Dave Mazza, Head of Research for SPDR ETFs at StateStreet Global Advisors. Dave, StateStreet already offers the most popular technology sector ETF, the Technology Select Sector SPDR, ticker XLK. You mentioned diversification, I'm just curious, is there any overlap in holdings between this new innovative technology ETF and then the technology sector SPDR?

Dave Mazza: There's actually fairly minimal overlap and that's one of the great benefits of how this product is constructed. Of course, the well-known XLK is looking at technology companies in the S&P 500. It's also market capitalization weighted, meaning the largest companies are actually going to have the largest weight. Again, this ETF is equally weighted and it actually looks across the entire US landscape, so we get large, mid, and small companies. Really, not letting one particular company drive performance going forward. That's a real potential benefit for someone who says, "Hey. I like technology. I'm familiar with this well-known product, maybe I can add a bit of this to the portfolio to really kilter that theme a bit further.

Nate Geraci: Interestingly, on the other end of the spectrum in terms of technology-related ETFs, as I know you're aware, there are several more narrowly focused ETFs out there. As a matter of fact, Andrew Chanin from PureFunds is going to join us on the program next week. They offer several ETFs covering cyber-security, big data, mobile payment technologies. These are obviously more niche ETFs. Is the idea with XITK to be a more diversified play than those ETFs, but not necessarily as broad as something like XLK?

Dave Mazza: That's 100% correct. I think there are some benefits potentially to really choosing a particular theme. There are some benefits to having innovative technologies across the board. That's, again, what we're looking to harness here. It's not just relying on one particular driver, going forward saying, "Let's look at technology in a broad setting. Let's look at it across the markets." Then create an index of truly innovative companies that are going to be disrupting multiple industries, not just one.

Nate Geraci: Dave, from a portfolio stand-point for investors listening to this show, what is the general rational for investing in technology?

Dave Mazza: Oftentimes technology has been thought of as an area to help boost the growth side of a portfolio. What you tend to find is technology companies in some cases can be more richly valued than the broader market because they're growing their earnings faster. In today's market environment, that's a bit nuanced. These particular companies tend to have some of the highest expected earnings growth going forward, and in an environment that's characterized by low and slow economic growth, they may be a benefit to investors. This is really something which can be a more satellite position. For investors who are looking to be more tactical, this could be an ETF that helps fit this market environment.

Nate Geraci: Again, we're visiting with Dave Mazza, Head of Research for SPDR ETFs at StateStreet Global Advisors. Dave, we have a few minutes left here. I was hoping you could maybe provide a quick overview on the overall tech sector right now. As part of that, I'd love your take on the so-called FANG stocks as well. Conor and I were talking earlier in the show about how Facebook, Amazon, Netflix and Google sort of lead the market last year, but 2016 isn't off to a great start for this group as a whole. What do you make of the overall tech sector right now?

Dave Mazza: I think what we saw last year was a market environment characterized by narrow breadth, meaning a few names really led from a momentum perspective. This year, it's been a market characterized by volatility. Investors have sought out safety vs quality. Looking ahead, you potentially may see investors say, "We know the divergent monetary policy. We know the US economy is one where ... maybe actually growing a bit faster than others, but certainly might not be growing as fast as some would like." If investors are looking to say, "How do I navigate this environment?" People may start focusing on staples. Staples for companies are boosting cyber security. Staples for consumers are actually now things like smartphones and tablets. We're seeing an economy that's evolving from a cyclical perspective and a secular perspective, and something like innovative technologies may help navigate those choppy waters.

Nate Geraci: All right Dave before we let you go, I'd be remiss if I didn't ask you about the start that we've had to the year overall. Obviously, you covering research ... The entire global markets, not just technology. If you don't mind I'd just love your general thoughts on the markets right now.

Dave Mazza: What we're seeing, I think, is a market that's sort of a confluence of events that's truly driven performance. It's been China, it's been oil, it's been the dollar. They've all hit essentially as the calendar year turned from 2015 to 2016. I think a lot of folks came in with modest expectations. In some cases those expectations are now being ratcheted down. The way I like to think about it though is taking a bit of a step back and saying, "This is one where we've been on a significant bull-run for a few years." It hasn't certainly felt like that. In this market, having some diversification, not just toward names that have been doing well, because I'm concerned about maybe over-crowding in some of those safer names. Having a bit of that in a portfolio, but balancing those out with areas in the market that may do well as the economy regains its footing, like financials and technology, could be a way to bolster a portfolio.

Nate Geraci: Is there anything you're watching in particular that may be a primary cause to drive markets either higher or lower?

Dave Mazza: I think it really comes back to the correlation of oil and equities. Many people were thinking that lower oil prices would be better for the economy. Now, people are concerned that oil prices are too low. Of course that’s how sentiment can change on a dime. At some point, if we start to see a settling or start to see there to be a bit of a decoupling from the equity markets and the broader commodities complex, I think that would be a sign of health. For now, I think many investors will continue to maybe stick to the sidelines and not necessarily jump back in. This is, again, an environment that in the near-term is likely to continue to experience some choppiness and one where investors need to probably ratchet down their expectations for total returns in 2015. Of course, with sell-offs, there may be opportunities for investors.

Nate Geraci: Dave, with that we'll have to leave it there. As always, we greatly appreciate you joining us today.

Dave Mazza: Thanks for having me.

Nate Geraci: That was Dave Mazza, Head of Research for SPDR ETFs at StateStreet. Again, the ETF we spotlighted was the SPDR FactSet Innovative Technology ETF. The ticker symbol is XITK. You can learn more about this ETF and the entire SPDR ETF lineup by visiting spdrs.com.