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Could a Sustained Tech ETF Rally Be in the Cards?

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Tech stocks have been massively hurt this year due to the Fed policy tightening. Technology Select Sector SPDR Fund (XLK - Free Report) is off 23.6% this year against 18% 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.

Against this backdrop, tech stocks rallied on Jul 7. The gains in semiconductor stocks were notable. CNBC’s Jim Cramer said that the recent rally in tech stocks could trigger a longer-term recovery.

One of Goldman’s top tech fund managers, Brook Dane, said in May 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.

Let’s delve a little deeper.

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.

“Tech’s Deflationary”

Cramer said that “tech is deflationary. You can lay off lots of people with new technology. You can figure out how to make things more cheaply, do more with less, because of technology. You can make better products with more tech. All of this is happening now”.

Economic Reopening in China

China shortened quarantines for international travelers last month, despite an uptick in Covid cases in the country. China has severed covid lockdown in the second quarter, but is less likely to enact it at the same scale again. Moreover, China’s top political leaders planned to boost economic stimulus to promote growth. There could also be easing of the continued clampdown on tech firms.

Corporate Strength is Not That Weak

Cramer notified that “the enterprise isn’t getting as weak as you’d normally expect in a Fed-mandated slowdown.” Hence, demand for technology from the enterprise level is still expected.

Tech Less Dependent on Supply Chain Based Woes

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.

Corrected Valuation

A massive selloff this year has corrected valuation of tech stocks. If the above-mentioned conditions hold good, the tech space would soar higher in the coming days as rich valuation is no more a deterrent.

ETFs in Focus

Below we highlight technology ETFs that have trended higher past week (as of Jul 7, 2022). These ETFs are in decent winning momentum.

Direxion Moonshot Innovators ETF (MOON - Free Report) – Up 5.3%

WisdomTree Cybersecurity Fund (WCBR - Free Report) – Up 4.4%

Franklin Exponential Data ETF (XDAT - Free Report) – Up 4.3%

WisdomTree Cloud Computing Fund (WCLD - Free Report) – Up 4.1%

ETFMG Real Estate Tech ETF – Up 3.5%  

Global X Cybersecurity ETF (BUG - Free Report) – Up 3.2%