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5 Cheap ETFs to Play Amid Tech Stocks' Worst Start Since 2016

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U.S. tech stocks are off to the worst start to a year since 2016 (per a Bloomberg article) as surging inflation is weighing on their lofty valuations caused by massive policy easing since the start of COVID-19 outbreak. Though tech stocks tried to recoup losses several times in the recent selloffs, investors continue to remain cautious to bet big on growth stocks. Hence, shares of technology companies still remain in a tight spot.

Due to the sky-high inflation, the Fed has paced up QE tapering. The Fed is also likely to enact its first rate hike since the start of the pandemic in its March meeting with many more likely to come this year. This rising rate worries have dampened the appeal for the stocks that rely on easy borrowing for superior growth. Technology falls in this category.

In any case, tech stocks are guilty of overvaluation. Lat month, Institutional Investor hall of famer Rich Bernstein, who runs Richard Bernstein Advisors, termed tech and cryptocurrencies as bubble assets due to high valuations.

Still, there are a few more reasons that may support the space despite rising rate fears.

Fears of More Mutations of COVID-19

Omicron is currently the variant that has taken the world in its grip. It is highly contagious, though milder in nature. As it is infecting people a lot faster than the previous variants, there are chances we will likely have more mutations or variants in the coming days. This will keep the charm of stay-at-home stocks like technology more-or-less intact.

Tech is New Normal

“New normal” trends like work-and-learn-from-home and online shopping, increasing digital payments and growing video streaming are sure to stay for long. The growing adoption of cloud computing, and the ongoing infusion of AI, machine learning and IoT are the other winning areas.

Big Tech Resistant to Inflation?  

Cramer explained that big tech names like Google-parent Alphabet (GOOGL) and Microsoft’s (MSFT) business model is not that responsive to changes in inflation, including the rise in prices for raw materials, chemicals and commodities like gas, plastics, packaging and so on. Higher transportation charges are also less likely to bother the operation of big tech companies. 5G could be a boom time for Apple as many will upgrade their phones while carriers expand their coverage of the new faster networks.

So, one may not choose to shy away from the tech sector altogether. Rather bet on the ones that are still have strong fundamentals and cheaper valuation. Against this backdrop, we highlight a few top- tech ETFs that have the lowest P/E ratios in the space and still have strong potentials. Biggest tech ETF  Technology Select Sector SPDR Fund (XLK - Free Report) has a P/E of 27.53X while the following ETFs have a lower P/E than that of XLK.

ETFs in Focus

First Trust NASDAQ Technology Dividend Index Fund (TDIV - Free Report) – 21.39X

The underlying NASDAQ Technology Dividend Index includes up to 100 Technology and Telecommunications companies that pay a regular or common dividend. Though tech ETFs are light on dividends, TDIV yields 1.76% annually.

Invesco S&P SmallCap Information Technology ETF (PSCT - Free Report) – 22.70X

The underlying S&P SmallCap 600 Capped Information Technology Index measures the overall performance of common stocks of U.S. information technology companies. Since small caps perform better in a rising greenback environment (which is possible if the Fed hikes rates), this fund may prove beneficial for investors. PSCT has a Zacks Rank #2 (Buy).

SPDR S&P Semiconductor ETF (XSD - Free Report) – 22.78X

XSD follows the S&P Semiconductor Select Industry Index represents the Semiconductor sub-industry portion of the S&P Total Markets Index. The semiconductor space is in the pink with demand flowing in from various sectors. The ETF XSD has a Zacks Rank #1 (Strong Buy).

Invesco S&P 500 Equal Weight Technology ETF – 23.24X

The underlying S&P 500 Equal Weight Information Technology Index equally weights stocks in the information technology sector of the S&P 500 Index. The ETF RYT has a Zacks Rank #1.

Defiance Quantum ETF (QTUM - Free Report) – 24.27X

The underlying BlueStar Quantum Computing and Machine Learning Index consists of a modified equal-weighted portfolio of the stock of companies whose products or services are predominantly tied to the development of quantum computing and machine learning technology.

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