Signs of gradual improvement in the economy have increased the chances of the Fed tapering its monetary support at some point this year. Accordingly, investors are moving from defensive sectors like utilities and consumer staples and to cyclical sectors like technology and industrials (read: Buy These ETFs to Profit from "Sector Rotation").
Cyclical or high growth stocks have largely been ignored by investors. But since these stocks are now attractively priced and promise bright long-term growth, investors can pay more attention to this space. A popular choice in this space is of course the technology sector.
Though the technology sector has been broadly mixed so far this year due to uncertainty surrounding some of the top tech players, it could well emerge as the winner as we progress into the second half of the year (read: Winning ETF Strategies For the Second Half).
While the sector enjoys virtual monopoly on several services in many countries, in others such as the U.S., an oligopoly is predominant. A lack of competition under both circumstances and high start-up costs that deter new entrants, make this space an obvious choice for investors seeking high long-term returns.
Cloud computing and mobility add to the long-term growth prospects of the sector. Further, since the technology firms have been dividend growth leaders, investors can depend more on these for income.
A look at the top ranked ETFs in the space that have a lower level of risk, could be a good idea for investors in the current volatile environment. One way to find a top ranked ETF in the tech space is by using the Zacks ETF Ranking system (read: Zacks ETF Rank Guide).
About the Zacks ETF Rank
The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, style box, or asset class. Our proprietary methodology also takes into account the risk preferences of investors. ETFs are ranked on a scale of 1 (Strong Buy) to 5 (Strong Sell) while they also receive one of three risk ratings, namely Low, Medium, or High.
The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of five ranks within each risk bucket. Thus, the Zacks ETF Rank reflects the expected return of an ETF relative to other products with a similar level of risk (see more in the Zacks ETF Center).
For investors seeking to apply this methodology to their portfolio in the tech sector, we have taken a closer look at the top ranked VGT below. This product has a Zacks ETF Rank of 1 or ‘Strong Buy’ with a ‘Low’ risk outlook, and thus could be a solid pick for investors seeking to tilt towards the tech sector this year:
Vanguard Information Technology ETF (VGT)
This is one of the largest and most liquid products in the technology ETF space with AUM of over $3 billion and average daily trading volume of roughly 219,000 shares. VGT is also the low cost choice in the space as it charges just 14 bps in fees and expenses.
In terms of performance, this fund hasn’t participated much in the current rally as it has added just around 7% year-to-date. This is lower than the broad market fund, SPY, and other products in the space by wide margins. However, we think it could be poised for a surge in the coming months, based on both technical and fundamental factors described below:
Although the fund hasn’t broken out of its near term range, its short-term moving averages have managed to stay above long-term levels. The 9-Day SMA is now comfortably above the longer-term 200-Day SMA, suggesting continued bullishness for this ETF (read: The Top Choice in the Tech ETF World?).
Meanwhile, the fund’s RSI is at just over 60, suggesting that the fund isn’t too overbought, and that it still has some more room to run before it gets ahead of itself. This is further confirmed by an upswing in the Parabolic SAR, although this figure should definitely be monitored closely.
The fund provides exposure to a large basket of 428 stocks by tracking the MSCI US Investable Market Information Technology 25/50 Index. It is highly concentrated in its top 10 holdings with 56% of assets, suggesting that company specific risk is pretty high and the top 10 firms dominate the returns of the fund.
Apple (AAPL), Microsoft (MSFT), Google (GOOG) and International Business Machines (IBM) occupy the top four spots. In terms of industrial exposure, computer hardware, system software, internet software, semiconductors and IT consulting make up for at least 10% share in the basket.
The product primarily focuses on large caps as it accounts for 80% of VGT, though a small allocation has been made to mid caps and small caps too. In terms of style, the ETF is skewed towards growth securities which is basically a momentum play and makes it a great strategy in a trending market (read: Bet on This Top Ranked Large Cap Growth ETF).
This proved to be the winning strategy for the fund in the past years, as VGT delivering a robust return of 45% over the trailing three years and 11.77% in the trailing one-year period. Additionally, the ETF yields a decent 1.13% in annual dividends.
Despite the fund’s relatively heavy concentration (20.66% as per xtf.com), this tech ETF still could be a good choice for investors. This is based on a solid combination of technical and fundamental factors, suggesting VGT could be a great pick in today’s market environment.
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