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Inside Tech ETFs' Decline: Is a Rebound in the Cards?

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After a successful run in 2020, thanks to rising digitization amid social distancing caused by the coronavirus-led lockdowns, Tech ETFs have been facing a slowdown this year. Global vaccine distribution and the rollout of stimulus under the Biden presidency have boosted the risk-on sentiments, which, in turn, pushed economy reopening-friendly sectors and stocks higher in 2021.

No wonder, tech stocks have been underperforming with Technology Select Sector SPDR Fund (XLK - Free Report) losing 0.4% this year so far. Apart from the vaccine rally, overvaluation concerns are weighing on the tech space. The need and durability of the tech area is undeniable. Hence, the ongoing corrections are probably opening some lucrative buying points.

Inside Overvaluation

The broader Computer and Technology sector has a forward P/E of 27.79X versus 21.31X of the S&P 500. The forward P/E of the Computer-Software industry is 37.37X, Computer-IT Services industry is 35.15X, Computer-Internet Services industry is 29.65X.

Internet - Software and Services has a forward P/E of 27.70X while Internet – Software has a P/E of 63.56X. Amid such steep valuation and rising rate worries, corrections in growth sectors like technology are understandable.

U.S.-Sino Tensions

Then comes the U.S.-Sino trade tensions. The top U.S. securities regulator implemented measures that could eliminate some foreign companies from American stock exchanges. Hence, Hong Kong shares of companies with U.S. listings were hit massively in the latest trading, with down 4.8%, Alibaba losing more than 5% and NetEase falling more than 4% at the time of writing.

Notably, the fate of large tech companies depends largely on the U.S.-China relationship. Tech companies that have extensive trade relations with China would be at high risk if there is any flare-ups in the trade war.

In 2018, Morgan Stanley equity strategists indicated that “semiconductor and semiconductor equipment companies have the highest revenue exposure to China at 52%” and are thus exposed to maximum risks of U.S.-China trade tensions.

Why Tech Stocks and ETFs Can Rebound Soon

First, virus cases are rising in Europe and some emerging economies like India. Easing of lockdowns is being rolled back or further lockdowns imposed in many countries. Here is where the tech sector is likely to stage a comeback as social distancing and stay-at-home operations will increase dependence on digitization. 

Furthermore, rising virus cases globally, tax hike fear in the United States and U.S.-China tensions have kept the global markets edgy, boosted flight to safety and brought down the benchmark U.S. treasury yield in recent sessions. If rates remain subdued in the near term on rising demand for safe havens, growth sectors like technology would move higher.

And last but not the least, the technology sector has evolved as a long-term bet. Digitization is part and parcel of the modern-era society and here’s where tech will rebound in the coming days. The sector holds strong potential on the fast emergence of the fourth industrial revolution.

Winning Tech ETFs of This Year in Focus

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

The underlying NASDAQ Technology Dividend Index includes up to 100 Technology and Telecommunications companies that pay a regular or common dividend. It yields 1.93% annually. It has been up 6.6% this year.

ProShares S&P Technology Dividend Aristocrats ETF (TDV - Free Report)

The underlying S&P Technology Dividend Aristocrats Index targets companies from information technology, Internet and direct marketing retail, interactive home entertainment, and interactive media and services segments of the economy. It gives exposure to tech-related companies that have raised their dividends for at least seven consecutive years. It yields 1.34% annually. It has added 4.2% this year.

Invesco S&P 500Equal Weight Technology ETF (RYT - Free Report)

The underlying S&P 500 Equal Weight Information Technology Index equally weights stocks in the information technology sector of the S&P 500 Index. It charges 40 bps in fees and yields 1.12% annually. It has been up 2% this year so far.

SPDR S&P Future Security ETF (FITE - Free Report)

The underlying S&P Kensho Future Security Index comprises U.S.-listed equity securities of companies domiciled across developed and emerging markets worldwide that are included in the Future Security sector. It charges 45 bps in fees and yields 0.82% annually. The fund has gained 1.6% this year so far.

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