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Cathie Wood Sees a Fast Recovery in Tech ETFs: Is It Possible?

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Ark Investment Management founder Cathie Wood believes the market is quite close to a bottom. Tech stocks will hit a trough and recover first, per CNBC. We all know that tech stocks have been massively hurt this year due to the Fed policy tightening.

Technology Select Sector SPDR Fund (XLK - Free Report) is off 26.7% this year against 21% crashes in the S&P 500. 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.

With the Fed on a policy tightening spree, investors are scratching their heads to determine if and when tech stocks will rebound. One of Goldman’s top tech fund managers, Brook Dane, said last month that the recent sell-off in the tech space (due to rising rates) has opened up a massive buying opportunity in some tech stocks, as quoted on CNBC. Notably, due to the sky-high inflation, the Fed has paced up policy tightening.

We also believe that when markets recover, tech stocks and ETFs will recover first. Here’s why.

Stagflation to Flatten Yield Curve?

The current scenario, marked by high inflation and lower economic growth, is called stagflation. The more the central bank hikes rates to contain inflation, the slower will be the economic growth.

Since 1980, the 10-3 (the spread between the 10-year and 3-month Treasury yields) has historically averaged about 165 basis points. Currently, the 10-3 spread is 169 basis points, in line with the average, as quoted in an InvestorPlace article published on Nasdaq.

Historically, the 10-3 tends to compress when the Fed hikes rates. This would actually hold a 10-year benchmark treasury yield from shooting higher. And the scenario is great for tech stocks. The latest fear of recession will also keep the surge in long-term bond yields in check, a plus for growth sectors like technology.

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?

CNBC’s Cramer once explained that big tech names like Google-parent Alphabet GOOGL and Microsoft’s MSFT business model are not that responsive to the 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.

Rise in Covid Cases

There has been a rise in Covid cases in various parts of the world including China, India and the United Kingdom. Moreover, China is tightening the Covid-related curbs. The world’s second biggest economy is eyeing a zero-Covid policy, which is a plus for the social-distancing sectors like technology.

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 right now.

ETFs in Focus

Technology Select Sector SPDR ETF (XLK - Free Report) – Zacks Rank #21(Strong Buy)

iShares Expanded Tech-Software Sector ETF (IGV - Free Report) – Zacks Rank #2 (Buy)

Vanguard Information Technology ETF (VGT - Free Report) – Zacks Rank #1

Fidelity MSCI Information Technology Index ETF (FTEC - Free Report) – Zacks Rank #1

iShares U.S. Technology ETF (IYW - Free Report) – Zacks Rank #2

Communication Services Select Sector SPDR Fund (XLC - Free Report) – Zacks Rank #2


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