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Bet on Cash-Rich Tech ETFs & Stay Away From the Rout

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Wall Street has been witnessing steep selloffs lately due to rising rate worries. Growing vaccine distribution and hopes of hefty stimulus under the Biden presidency along with a dovish Fed stoked inflationary pressure and boosted long-term treasury yields.

The tech-heavy Nasdaq was the worst performer last month among the big three indexes. This is because the tech bunch of growth stocks that won during the pandemic-ridden 2020 on low rates are now getting a bashing on rising rates. The Nasdaq Composite has lost 6.5% past month while the S&P 500 is off 1.6%.

U.S. benchmark Treasury yields started February at 1.09% and ended the month at 1.44%, having hit a high of 1.60% (the maximum in a year) in the final week of the month. As of Mar 4, 2020, the benchmark treasury yield stood at 1.54%.

Should You Buy Cash-Rich Tech ETFs on the Dip?

The sector is favored by most analysts, not only because of its emerging offerings but also for its cash balance. Investor capital has been most focused on FAAMG (Facebook, Amazon, Apple, Microsoft and Google-parent Alphabet). The FAAMGs took 22% share of the S&P 500's market cap in July 2020, up from a 16% average in 2019 and the maximum concentration by the top five stocks since at least 1980, according to S&P Dow Jones Indices data.

Tech companies are cash-rich. As of third-quarter 2020, cash, cash equivalents and marketable securities stood at around $491.83 billion. Alphabet appears to have the highest cash and marketable securities worth $136.69 billion.

From the price/cash flow (P/FCF) angle, the tech sector is cheaper than the S&P 500. Investors should also note that the P/FCF ratio of the computer and technology market now stands at 26.1x against the S&P 500 Composite Market ETF’s P/CF of 30.5x. There are more reasons to be enthusiastic about the sector. In the dotcom bubble era, the tech sector’s P/FCF was higher at about 28.92x. 

Investors should also note that hoarding cash could be a great strategy for the near term as cash-rich companies face less downside risk in a market selloff. Companies that have strong balance sheets and stable cash flows may have chances to weather rising rate worries yet register growth in the current environment. If the company is cash-rich, it should have lesser dependence on cheap money.

This is truer given that the pandemic has left a long-lasting impact on distant operations. “New normal” trends like work-and-learn-from-home and online shopping, increasing digital payments and growing video streaming are sure to stay here for long. The growing adoption of cloud computing, and ongoing infusion of AI, machine learning and IoT are the other winning areas.

Notably, the classical tech ETF Technology Select Sector SPDR Fund XLK) (that invests about 41% of the portfolio in Apple and Microsoft) has retreated about 3.1% past month and was fell 2.2% on Mar 4’s tech rout. Meanwhile, 2020’s hot growth ETF ARK Innovation ETF (ARKK - Free Report) has declined 14.4% past month and shed about 5.3% on Mar 4. ARKK is heavy on Tesla, followed by other names like Square, Roku, Teladoc and Spotify. (read: Is ARK ETFs' Stellar Journey Over?).

So, don’t shy away from the tech sector altogether. Rather bet on the ones that are cash rich and scrape through the volatility. Against this backdrop, we highlight a few top-ranked tech ETFs that could be bought on sale.

Technology Select Sector SPDR ETF (XLK - Free Report) ) – Zacks Rank #2 (Buy)

iShares Expanded Tech-Software Sector ETF (IGV - Free Report)  Zacks Rank #1 (Strong Buy)

Vanguard Information Technology ETF (VGT - Free Report) – Zacks Rank #2

Fidelity MSCI Information Technology Index ETF (FTEC - Free Report) – Zacks Rank #2

iShares U.S. Technology ETF (IYW - Free Report) – Zacks Rank #1

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