June 6, 2023


It's the Technology

ETFs to Buy on the Possible Microsoft-TikTok Acquisition

The world’s largest software maker Microsoft MSFT is in talks to acquire TikTok, the popular mobile video app owned by Chinese company ByteDance, in four markets – United States, Canada, New Zealand and Australia. The news came after President Donald Trump threatened to ban the Chinese app in the United States on national security concerns.

Microsoft aims to complete the deal by Sep 15. President Donald Trump said that the Chinese-owned app will be “out of business” by Sep 15 in the United States if the parent company ByteDance does not sell TikTok to Microsoft or another American company.

If the deal is finalized, Microsoft plans to bring all American user data to U.S. servers and remove data backed up in foreign countries. Currently, TikTok stores U.S. user information in the United States and backs it up in Singapore (read: Microsoft Cloud Sales Slow in Q4: What Lies Ahead for ETFs?).

TikTok has had exponential growth since it was launched in the United States in 2018 buoyed by teenagers’ love for its short comedic videos and novel dance clips. The app, excluding the Chinese version Douyin, has been installed nearly 2.1 billion times as of Jul 30, according to market research firm Sensor Tower. The app has an estimated 100 million users in the U.S. alone. As such, it has emerged as a significant competitor to Facebook FB and Google’s GOOGL YouTube.

The acquisition news has led to smooth trading in the Microsoft stock. Shares of MSFT jumped 5.6% on the day. Currently, Microsoft carries a Zacks Rank #3 (Hold) and has a Growth Score of A. It falls under a top-ranked Zacks industry (top 40%), which suggests its outperformance in the days ahead.

ETFs in Focus

Investors seeking to invest in this software leader could do so through ETFs with a lower level of risk. While there are several ETF options available, we have highlighted six with double-digit exposure to Microsoft that could be compelling choices.

Select Sector SPDR Technology ETF XLK

This most-popular technology ETF follows the Technology Select Sector Index and has $33.2 billion in AUM. The fund charges 13 bps in fees per year from investors and trades in heavy volume of around 10.3 million shares a day on average. It holds about 71 securities in its basket, with Microsoft occupying the second position at 20.9%. XLK has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook (read: More Run for Tech ETFs After Sizzling Earnings?).

iShares U.S. Technology ETF IYW

This ETF tracks the Dow Jones U.S. Technology Capped Index, giving investors exposure to 161 technology stocks. Of these, Microsoft occupies the top position in the basket with 18.3% of the assets. The fund has AUM of $6 billion and charges 42 bps in fees and expenses. Volume is good as it exchanges nea
rly 131,000 shares a day. The fund has a Zacks ETF Rank #1 with a Medium risk outlook.

Vanguard Information Technology ETF VGT

This fund manages about $34.3 billion in its asset base and provides exposure to 330 technology stocks. It currently tracks the MSCI US Investable Market Information Technology 25/50 Index. Here MSFT occupies the second position with 18% share. The ETF has 0.10% in expense ratio, while volume is solid at nearly 767,000 shares. It has a Zacks ETF Rank #1 with a Medium risk outlook.

MSCI Information Technology Index ETF FTEC

This fund is home to 322 technology stocks with AUM of $4.3 billion. It follows the MSCI USA IMI Information Technology Index. MSFT is the second firm with 17% allocation. The ETF has 0.08% in expense ratio, while volume is solid at 488,000 shares a day. It carries a Zacks ETF Rank #1 with a Medium risk outlook.

iShares Evolved U.S. Technology ETF IETC

This is an active ETF, having accumulated $79.4 million in its asset base. It employs data science techniques to provide exposure to 227 technology stocks. Microsoft is the top firm with 16.4% allocation. IETC trades in a light volume of 43,000 shares and charges 18 bps in annual fees (see: all the Technology ETFs here).

iShares Global Tech ETF IXN

This product provides exposure to electronics, computer software and hardware, and informational technology companies by tracking the S&P Global 1200 Information Technology Sector Index. Holding 119 stocks in its basket, Microsoft occupies the second spot with 16.7% share. The ETF has amassed $4.1 billion in its asset base and trades in good volume of 69,000 shares a day on average. Expense ratio came in at 0.46%.