Microsoft ETFs to Watch on Surging Cloud Ahead of Q3 Earnings

Microsoft MSFT is set to release fiscal third-quarter 2020 results on Apr 29 after market close. Being the world’s largest software maker, it is worth taking a look at the company’s fundamentals ahead of its results.

Over the past three months, the stock has gained 5.2% outperforming the industry, which has shed nearly 8%. The outperformance is expected to continue if the software leader beats estimates (see: all the Technology ETFs here).

Inside Our Methodology

Microsoft has a Zacks Rank #3 (Hold) and an Earnings ESP of -0.81%. According to our surprise prediction methodology, the combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 increases the odds of an earnings beat. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

The stock saw negative earnings estimate revision of a couple of cents for the fiscal third quarter over the past 30 days. The Zacks Consensus Estimate indicates substantial earnings growth of 11.4% from the year-ago quarter. Microsoft projects substantial year-over-year revenue growth of 10.7%. Its earnings track is impressive, with the last four-quarter positive earnings surprise being 13%, on average. The stock boasts a solid Growth Score of B and belongs to a top-ranked Zacks industry (top 17%).

Microsoft Corporation Price, Consensus and EPS Surprise

Microsoft Corporation Price, Consensus and EPS Surprise

Microsoft Corporation price-consensus-eps-surprise-chart | Microsoft Corporation Quote

The Zacks Consensus Estimate for average target price is $188.73 with nearly 96% of the analysts having a Strong Buy or a Buy rating ahead of earnings. This represents nearly 8.4% upside from the current price.

What to Watch?

Investors will closely monitor cloud-computing sales as the COVID-19 pandemic has resulted in a dramatic surge in demand for such services. Microsoft announced that usage of Skype rose 70% in March and that the platform now has 40 million daily active users. In particular, it saw a whopping 775% increase in the use of its cloud services in areas with social distancing or shelter-in-place orders (read: What Will Earnings Bring for Cloud ETFs?).

Late in February, Microsoft warned of weakness in its PC business as the coronavirus outbreak disrupted its device shipments. As such, the company dismissed the third-quarter revenue forecast for its PC unit. However, the softness is expected to be offset by surging usage of cloud-based services driven by people working remotely.

ETFs in Focus

Given this, ETFs having the highest allocation to this this tech giant will be in focus. These funds could be potential movers if Microsoft surprises the market.

Select Sector SPDR Technology ETF XLK

This most-popular technology ETF follows the Technology Select Sector Index and has $26 billion in AUM. The fund charges 13 bps in fees per year from investors and trades in heavy volume of around 15.6 million shares a day on average. It holds about 71 securities in its basket, with Microsoft occupying the top position at 21.9%. XLK has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.

iShares Dow Jones US Technology ETF IYW

This ETF tracks the Dow Jones U.S. Technology Capped Index, giving investors exposure to 154 technology stocks. Of these, Microsoft occupies the top position in the basket with 19.6% of the assets. The fund has AUM of $4.7 billion and charges 42 bps in fees and expenses. Volume is good as it exchanges nearly 162,000 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 $25.5 billion in its asset base and provides exposure to 319 technology stocks. It currently tracks the MSCI US Investable Market Information Technology 25/50 Index. Here MSFT occupies the top position with 18.5% share. The ETF has 0.10% in expense ratio, while volume is solid at nearly 951,000 shares. It has a Zacks ETF Rank #1 with a Medium risk outlook (read: “Cash is King:” Buy These Tech ETFs to Beat Coronavirus).

MSCI Information Technology Index ETF FTEC

This fund is home to 314 technology stocks with AUM of $3.3 billion. It follows the MSCI USA IMI Information Technology Index. MSFT is the top firm with 18.6% allocation. The ETF has 0.08% in expense ratio, while volume is solid at 543,000 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 $35.7 million in its asset base. It employs data science techniques to provide exposure to 234 technology stocks. Microsoft is the top firm with 17.5% allocation. IETC trades in a light volume of 22,000 shares and charges 18 bps in annual fees.

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 top spot with 17.9% share. The ETF has amassed $3.1 billion in its asset base but trades in a good volume of 115,000 shares a day on average. Expense ratio came in at 0.46%.

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