ETFs To Bet Against Apple

by on March 19, 2012 | ETFs Mentioned:

Apple (AAPL) has been one of the best performing stocks of the last several years, and has also become one of the most widely followed companies ever. The stock has been climbing sharply higher, recently piercing through the $600 level–a feat that just a few years ago would have seemed impossible. Given the red hot performance, most professional money managers feel as if they have to own AAPL stock–despite some concerns about the current valuation and a potential pullback in share value. Despite the company’s impressive resurrection and status as a leading tech innovator, there are reasons to be a bit nervous about the stock as currently priced [see Seven Reasons To Hate Gold As An Investment]. 

Brett Arends at SmartMoney and Frank Byrt at TheStreet recently put out a couple interesting articles outlining why it might be time to take gains in Apple (or stay on the sidelines if you’ve missed out on the rally). Even if Apple continues to come up with exciting products and tap into new markets, justifying current valuations over the long haul could be a big challenge. 

Betting Against Apple…With ETFs

The most obvious way to bet against Apple is to short the stock. But most investors probably don’t have the tolerance for such a risky trade–especially after the stock has skyrocketed consistently for the past several years. Short selling is a dangerous proposition with any security. When the security in question is stock of the largest company in the world that has been on a meteoric rise (and, as it happens, maintains what can only be described as a cult following among both investors and consumers), the stakes get even higher [try our Free ETF Stock Exposure Tool]. 

But there are ways to bet against a security without explicitly establishing a short position. Underweighting stocks that are expected to disappoint relative to their peer group is one way to place such a measured bet without taking on excessive risk [see our High Tech ETFdb Portfolio]. And there are a number of ETFs that allow investors to do just that with Apple, establishing a portfolio that is light on exposure to the tech giant. 

AAPL now accounts for a significant portion of many popular ETFs, including both tech-heavy and broad-based fund [see Technology Equities ETFdb Category]. The PowerShares QQQ allocates about 18% of its holdings to Apple, and the stock makes up about 4.3% of the S&P 500 SPDR (SPY). But there are a number of broad-based stock ETFs that have much smaller weightings to the tech giant, allowing investors to cut back their Apple exposure without the big potentials for loss that short selling entails:  

WisdomTree LargeCap Dividend Fund (DLN)

By almost any measure, Apple is a massive company. It maintains a huge market cap, reports monstrous earnings, and delivers big sales numbers. But by one fundamental measure, AAPL is insignificant: dividends. Though the company has been raking in cash–it recently had liquid assets that exceeded the U.S. government–it has yet to make a meaningful return of that cash to its shareholders. Apples’s lack of a dividend is a controversial topic among investors, but one ramification of this decision is very clear cut: AAPL stock won’t be included in any ETFs linked to dividend-weighted indexes [see How An Apple Dividend Would Impact ETFs].  

DLN offers exposure to a broad basket of U.S. stocks, but includes only those that make dividend payments. So the portfolio includes big weightings to blue chips such as AT&T, Exxon, Microsoft, and GE, but doesn’t hold a single share of AAPL. That absence has been a hindrance in the past, but could work to your advantage if AAPL stock struggles going forward [see DLN Holdings]. 

Guggenheim S&P Equal Weight ETF (RSP)

Equal weighting methodologies can be thought of as a great tool for leveling the playing field; the size of a company just doesn’t matter. RSP features perfect overlap with SPY; both hold the 500 stocks that make up the S&P 500. But whereas SPY weights each according to the value of its equity–thereby giving AAPL the largest allocation–RSP treats each security the same. So instead of a hefty weight in excess of 4%, AAPL accounts for only about 0.20% of RSP. That’s the same weight given to much smaller lesser-known companies, such as Textron and LSI Corporation [see Equal Weight ETFdb Portfolio]. 

First Trust Large Cap Core AlphaDEX Fund (FEX)

Another option for broad-based large cap exposure that is light on AAPL is FEX, one of the AlphaDEX ETFs offered by First Trust. This ETF is linked to an “enhanced” index that uses various quantitative measures to construct a portfolio of stocks deemed to maintain the greatest potential for capital appreciation. The nuances of the selection and weighting methodology result in a balanced portfolio, with many big name stocks getting much smaller allocations than they would in a cap-weighted product (if they even make the cut to be included). 

AAPL does find its way into the FEX portfolio (which isn’t surprising) but not as the top holding. Not even in the top 25; AAPL accounts for less than one half of one percent of FEX’s portfolio, behind names such as Sears, Sherwin-Williams, and Dollar Tree [see FEX Holdings]. 

ETFs And Apple

Apple is only one component of any ETF, and utilizing the products above won’t necessarily have a big impact on your bottom line. But investing is a game of basis points, and every little bit helps. Many investors focus on what their investment products include, when sometimes the most significant components of an ETF are the stocks that are excluded (or at lease underweight). By shifting exposure towards exchange traded products that afford minimal allocations to AAPL stock, investors are able to place a small bet (but a bet nevertheless) against the tech juggernaut without taking on a significant amount of risk or sacrificing anything in terms of balance or depth of holdings in their portfolios. 

Disclosure: No positions at time of writing.