Post New

Sales of software, either with customizing software systems (which tend to become entrenched within the customer's infrastructure and extremely expensive, and usually pointless, for them to move) and providing services (and/or product upgrades), or through leasing is a really good business. It tends to intrinsically have moat-like characteristics, as well as very high returns on equity because you are selling rights, not physical products.

Over time, we also know that equal weight does better than market cap weight, notwithstanding the fact that market cap has done unusually well over the last decade. Over larger stretches of time, and over many geographies, equal weight is the better choice.

Can software and equal weight be combined? I'm pretty fond of XSW, which holds the components of the Software and Services S&P500 index with equal weight.

QQQE (the Nasdaq equal weight) is great, but XSW has performed even better over time at least as far as the stock price.

What about their relative increases in intrinsic value between QQQE and XSW? That matters more, and I would like to think that the software firms within QQQE would have an edge over the rest of QQQE.

I'd love some help with this. XSW has a reported forward PE of about 28 reported by SPDR. This seems low for software, today in particular, so I'm a little careful. They explain the forward PE as:

The weighted harmonic average of current share price divided by the forecasted one year earnings
per share for each security in the fund. Negative and positive outliers are included in the calculation.
https://www.ssga.com/library-content/products/fact...

I wonder if anyone can help me with this question. Why do indexes sometimes use this method of calculating PE using harmonic averages? I would have thought that the best way to calculate a PE for an index would be:

                      Sum of market capitalizations of all firms
PE (index) =  ----------------------------------------------------------
             Sum of earnings (both positive and negative) over all firms

Can anyone explain the pros/cons of this formula above, versus the harmonic averages uses as used by SPDR for the XSW ETF.

My main research question, and second question, is what is the increase in sale per share of QQQE (equal weight NASDAQ) compared to the increase in sales per share of XSW (equal weight software services sector) from 2012 to 2025.

That would be a good proxy for the relative increase in intrinsic value per share of QQQE versus XSW from 2012 to 2025, and I reckon XSW had an even stronger IV increase than QQQE but I'd like evidence. Looking at the stock price doesn't cut it of course, as one or the other index may have had a larger change in valuation multiples. Using sales per share growth is a better proxy for IV increase, than earnings growth, as that also eliminates problems with temporary high/low margins at the start and end dates.

Thanks for any help.

- Manlobbi

Out of curiosity I looked at the top ten holdings of QQQE and SXW (data from Yahoo).
SXW is a very interesting list. It's not clear to me how many are 'moaty' yet. Some seem to be trying to get established (QBTS is quantum computing), some have negative earnings.

QQQE Top 10 Holdings (10.37% of Total Assets)
Symbol Company % Assets
AVGO Broadcom Inc. 1.07%
FANG Diamondback Energy, Inc. 1.05%
GFS GLOBALFOUNDRIES Inc. 1.04%
SBUX Starbucks Corporation 1.04%
MCHP Microchip Technology Incorporated 1.03%
AMD Advanced Micro Devices, Inc. 1.03%
BIIB Biogen Inc. 1.03%
NVDA NVIDIA Corporation 1.03%
EXC Exelon Corporation 1.02%
ROST Ross Stores, Inc. 1.02%
FWIW, M* says QQQE is 'large blend'

XSW Top 10 Holdings (8.92% of Total Assets)
Symbol Company % Assets
QBTS D-Wave Quantum Inc. 1.53%
SOUN SoundHound AI, Inc. 1.10%
GDYN Grid Dynamics Holdings, Inc. 0.85%
KVYO Klaviyo, Inc. 0.79%
WK Workiva Inc. 0.79%
PLTR Palantir Technologies Inc. 0.78%
WEAV Weave Communications, Inc. 0.78%
ALTR Altair Engineering Inc. 0.77%
MITK Mitek Systems, Inc. 0.77%
HCP HashiCorp, Inc. 0.76%
FWIW, M* says XSW is 'small growth'

Why do indexes sometimes use this method of calculating PE using harmonic averages?

https://en.wikipedia.org/wiki/Harmonic_mean

It is the most appropriate average for ratios and rates such as speeds, and is normally only used for positive arguments.
The harmonic mean is the reciprocal of the arithmetic mean of the reciprocals of the numbers

So it's a way to average the PEs appropriately by averaging their reciprocals, i.e. their Earnings Yield. That way everything stays in "PE space" so it makes conceptual sense to us.

So it's a way to average the PEs appropriately by averaging their reciprocals, i.e. their Earnings Yield. That way everything stays in "PE space" so it makes conceptual sense to us.

A more meaningful way to express this is that the PE average (as harmonic mean) is simply an average of all the earnings yields. The final average earnings yield is then concerted back the PE ratio by as usual inverting it.

This very similar to the method I proposed (the sum of market caps divided by simply summing all the actual earnings) except that my method accounts for the companies having different sizes. A company with meager earnings (positive or negative) would effect the average much less than a large company with huge earnings (or losses).

The harmonic mean approach gives equal weighting to each company in the index (as is just averaging the yields).

The key insight is that for an equal weight used the results would he very similar.

I’m consequently very happy with the harmonic mean approach specifically when applied to an equal weighted index. For a market cap weighted index you would need to use the method I proposed.

I wanted to check this because the forward PE of the Software and Services ETF (XDE) is reported as 28 (stated as using harmonic mean) which is in my view not too expensive, given how rapidly these firms are growing on trend.

- Manlobbi

Hi Manlobbi,

First, thank you for all you do.

I went to morningstar to look up xde, and it does not exist.

Thanks in advance.

Got it. Thanks. XSW looks good.

There are a whole lot of technology ETFs.

https://etfdb.com/etfdb-category/technology-equiti...

Post New

US Policy FAQ

---

Contact Shrewd'm
Contact the developer of these message boards.