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Thursday, March 28, 2024

Half Of Apple’s 2017 Gains Are From ETF Flows

Courtesy of ZeroHedge. View original post here.

When it comes to Apple, it has become almost apocryphal to suggest that the world’s most valuable company whose (offshore but not for long) cash hoard is bigger than the GDPs of most countries, owes its nearly $1 trillion market cap to anything less than the stellar success of its products, by which we of course mean the iPhone. And yet, as one bank after another has cautioned in recent weeks – Deutsche Bank most recently Apple’s magic goose may no longer be laying “supercycle” eggs, now that the iPhone X is officially a dud, with Cupertino quietly ordering production to be slashed as much as 50% following a historic gamble: the price of its latest gadget was just too high, leading to a plunge in interest.

Now, as Deutsche observed, Apple’s shares were up 46% in 2017, significantly outperforming the markets. This outperformance came from the iPhone X/8 anticipation trade, with much of this upside coming early in the year as investors got excited about the new iPhone X. The problem is that in light of the mediocre demand for the iPhone X – whether due to price or some other reason – investors clearly got ahead of themselves, and while virtually everyone id HODLing AAPL for now, once Tim Cook is forced to guide down, things may get ugly.

There is another problem, and this goes beyond the company’s business and operational decisions.

As the German bank shows, the other key driver of Apple’s strong performance in 2017 was the overall market’s strong performance. The S&P 500 was up 19% in 2017, while the NASDAQ was up 28%. Apple accounts for 4% of the S&P 500, which means that passive investors need to own a decent-sized portion of Apple shares in order to perform in line with the market.

But the real punchline is ETFs, and specifically how greatly the inflow into passive strategies has boosted Apple’s stock price, for no other reason than simply because retail investors wanted equity exposure via market ETFs!

As seen below, passive funds continue to account for a larger share of mutual funds and ETFs, which means that more funds are buying Apple when the markets go up. In addition to this growth in passive funds, the performance of many active funds is judged based on an index like the S&P 500 or the NASDAQ, which means these funds will try to match these indexes to some extend.

And the punchline: according to German bank’s calculations, it was nothing more than the market’s blistering performance last year, coupled with the stocks’ reliance on ETF flows, that helped drive roughly half of the upside in Apple’s shares in 2017! Or, as Deutsche says: “we believe the fact that markets saw strong performance in 2017 helped drive roughly half of the upside in Apple’s shares in 2017.

Finally, in addition to the benefit of strong market performance, DB believes that Apple’s shares are also benefiting from the shift to ETFs. Many managed funds have limits on how much they can own of any one stock, which means that some passive funds, even ones that track the markets, can’t hold Apple at its full market weighting.

However, ETFs don’t make this distinction, and ETFs that track certain indexes are fully weighted to the stocks in that index. As seen in the figure below, ETFs now account for 23% of passive investments, up 2ppts Y/Y and up 13ppts over the past 10 years. Given ETFs hold stocks at their market weight, this shift to ETF trading strategies has been a positive for Apple’s shares.

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