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Don't Fear, Buy the Dip in Tech ETFs

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After a prolonged rally, tech stocks and ETFs slumped on Jan 11as many of these companies barred President Donald Trump and cracked down on other accounts spreading misinformation. Shares of Twitter (TWTR - Free Report)  fell more than 6.4% after the company permanently banned Trump from the social media platform on Friday, citing  risk of further unrest after last week’s protests at the Capitol.

Facebook (FB - Free Report) shares also sank more than 4% after suspending Trump’s Facebook and Instagram accounts until at least the end of his term. Apple (AAPL - Free Report) and Alphabet (GOOGL - Free Report) also “removed Parler from their respective app stores after saying the company did not do enough to address violent threats on its platform, and Amazon (AMZN) said it would no longer host Parler on Amazon Web Services,” as quoted on Yahoo Finance. Apple lost 2.3% on Jan 11 while Alphabet was off about 2.3%.

Time to Buy the Dip

Tech earnings are likely to decline 0.4% in Q4 on 9.2% higher revenues. This is in contrast to a 10.1% slump in S&P 500 earnings on a 0.1% increase in revenues. The technology sector is among the very few outperformers in the otherwise-downbeat earnings trends.

Tech companies are cash-rich. From the price/cash flow (P/FCF) angle, the tech sector (24.3X) is slightly cheaper than the S&P 500 Composite Market ETF (27.2X). The tech sector’s debt profile is also impressive. Debt as a proportion of equity of the tech sector is 31% versus 70% of the S&P 500. Investors should also note that hoarding cash could be a great strategy as long as the coronavirus fear prevails.

Moreover, the latest news on the outbreak of a new coronavirus strain (which is reportedly several times more infectious than the initial strain) in the UK may play foul in the economy and markets. Further lockdown fears may benefit tech stocks – the real winner of the coronavirus pandemic.

Social distancing norms enacted globally to mitigate the spread of the virus compelled people to stay at home, binge on online shopping, and work as well as learn from home, thereby boosting demand for technology.

Plus, a massive cyber attack, targeting as many as 18,000 U.S. companies and government agencies, was unearthed recently. The news brightened the appeal for a specific corner for tech sector — cyber security — even more.

If these were not enough, Apple said it is foraying into the electric vehicle segment. Apple said it will present a brand-new battery technology, and plans to deliver its first EV sometime in 2024. EV is a booming segment led by Tesla (TSLA). Apple’s entry in the field will make the space more appealing.

Against this backdrop, below we highlight a few tech ETFs that should be in your portfolio.

Global X Cybersecurity ETF (BUG - Free Report)

The underlying Indxx Cybersecurity Index is designed to provide exposure to exchange-listed companies that are positioned to benefit from increased adoption of cybersecurity technology, including but not limited to companies whose principal business is in the development & management of security protocols preventing intrusion & attacks to systems, networks, applications, computers & mobile devices. The fund charges 50 bps in fees.

Ark Autonomous Tech & Robotics ETF (ARKQ - Free Report)

Companies in ARKQ are focused on and are expected to substantially benefit from the development of new products or services, technological improvements and advancements in scientific research related to energy, automation and manufacturing, materials, and transportation. It charges 75 bps in fees.

Invesco NASDAQ Next Gen 100 ETF (QQQJ - Free Report)

If investors are skeptical about big tech names after the latest crash, they can bet on mid-cap tech stocks with this Nasdaq fund.The underlying NASDAQ Next Generation 100 Index of the fund comprises securities of the next generation of Nasdaq-listed, non-financial companies. Information Technology takes about 43.5% of the fund.

Dynamic Software Invesco ETF (PSJ - Free Report)

The underlying Dynamic Software Intellidex Index comprises stocks of software companies. The index is designed to provide capital appreciation by evaluating companies based on a variety of investment merit criteria, including fundamental growth, stock valuation, investment timeliness and risk factors. The fund charges 56 bps in fees.

First Trust Cloud Computing ETF (SKYY - Free Report)

The underlying ISE Cloud Computing Index is a modified market capitalization weighted index designed to track the performance of companies actively involved in the cloud computing industry. The fund charges 60 bps in fees.

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