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3 Reasons Why Tech ETFs May Rebound in 2023

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U.S. tech stocks hit rough weather last year as surging inflation weighed on their lofty valuations caused by massive policy easing during the peak of the COVID-19 outbreak. Although tech stocks tried to recoup losses several times, investors remained cautious about betting big on growth stocks.

Rising rate worries dampened the appeal of the stocks that rely on easy borrowing for superior growth. Hence, shares of high-growth technology companies remain in a tight spot. As a result, the largest tech ETF Technology Select Sector SPDR Fund (XLK - Free Report) has lost about 30% past year (as of Jan 9, 2022).

Now the question is if the sector is able to make a comeback in 2023. Daniel Ives, Wedbush’s well-known tech bull, sees reasons for hope in the tech sector in 2023, as quoted on TipRanks. “In this carnage we see growth opportunities as we believe overall the tech sector will be up roughly 20% in 2023 from current levels with Big Tech, software, and semis leading the charge despite the macro/Fed wild cards,” per Ives.

Slower Rate Hikes in the Coming Days

With the release of some downbeat economic indicators to start New Year, the Fed may slower the rate hike momentum in the coming days. Fed officials raised interest rates by a half-point in December, extending their aggressive tightening campaign and bringing the target on their benchmark rate to a target range of 4.25% to 4.5%.

The policymakers also forecast that their key short-term rate will reach a range of 5% to 5.25% by the end of 2023, before being slashed to 4.1% in 2024. That suggests that the Fed is prepared to hike its benchmark rate by an additional three-quarters of a point and then stay put until the end of 2023. And we can expect a pivot in 2024. This can go in favor of the technology stocks and ETFs after a tough 2022.

Layoffs to Boost Profitability?

Silicon Valley layoffs have been intense. Amazon, Meta, Twitter, Salesforce – most of the tech giants have been on layoff spree.  Video-sharing outlet Vimeo said it was axing 11% of its workforce. The digital fashion platform Stitch Fix said it planned to cut 20% of its salaried staff, after having slashed 15% of its salaried staff last year. Such layoffs and cost reduction may boost profitability of the tech companies.

Tech is New Normal

“New normal” trends like work-and-learn-from-home and online shopping, increasing digital payments and the growing video-streaming scenario 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. Expanding data centers will continue to bolster the cloud business. Also, strong focus on AI techniques and the home automation space should the technology sector.

Against this backdrop, below we highlight a few tech ETFs that have been in momentum this year (as of Jan 9, 2023) and have a lower P/E than FactSet Segment Average of 28.28X.

ETFs in Focus

SPDR S&P Semiconductor ETF (XSD - Free Report) – P/E: 22.78X; YTD Performance: 3.37%

First Trust NASDAQ Technology Dividend Index Fund (TDIV - Free Report) – P/E: 21.39X; YTD Performance: 3.31%

Invesco S&P SmallCap Information Technology ETF (PSCT - Free Report) – P/E: 22.70X; YTD Performance: 3.23%

Defiance Quantum ETF (QTUM - Free Report) – P/E: 24.27X; YTD Performance: 3.11%

First Trust Indxx Metaverse ETF (ARVR - Free Report) – P/E: 10.68X; YTD Performance: 2.9%

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