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Big Tech ETFs Roar: Will the Rally Continue?

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The appeal for the mega-cap technology stocks roared back this month on their so-called safe haven status following the bank crisis led by the collapse of Silicon Valley Bank. The S&P 500 Information Technology Sector Index climbed nearly 6% over the past month, solidifying its place as the second-best performing group of the S&P 500 during 2023.

The most popular and biggest ETFs in the tech sector like Vanguard Information Technology ETF (VGT - Free Report) , Technology Select Sector SPDR Fund (XLK - Free Report) , iShares US Technology ETF (IYW - Free Report) , VanEck Semiconductor ETF (SMH - Free Report) and iShares Semiconductor ETF (SOXX - Free Report) gained more than 6% each over the past month.

The fears of contagion across the globe have compelled investors to adopt an old strategy and flock toward mega caps’ cash-rich balance sheets and durable revenue streams. This is especially true as these companies have strong balance sheets and robust profit margins, and are better positioned to withstand a possible economic downturn. These are also set to benefit from a steep drop in bond yields.

In particular, the top three mega names — Apple (AAPL - Free Report) , Alphabet (GOOGL - Free Report) and Microsoft (MSFT - Free Report) — have seen more than $600 billion in a combined rally this month. Three other heavyweights — Nvidia (NVDA - Free Report) , Meta Platforms (META - Free Report) and Tesla (TSLA - Free Report) — are the biggest gainers in March. Notably, Alphabet shares are on track for their biggest monthly gain in several years.

The decline in yields during the collapse of a series of banks as well as a dovish Fed, also drove the rally. As expected, the Fed raised interest rates by 25 bps in the FOMC meeting but signaled that an end to interest rate increases could be on the horizon. As the tech sector relies on borrowing for superior growth, it is cheaper to borrow more money for further initiatives when interest rates are low. Two-year yields dropped to nearly 3.9% from a 16-year high of 5.084% hit on Mar 8, while 10-year yields plunged to 3.5% from a 15-year high of 4.338% hit on Oct 21 (read: Is it Time for Growth ETFs as Fed Softens Hawkish Tone?).

ETFs in Focus

Vanguard Information Technology ETF (VGT - Free Report)

Vanguard Information Technology ETF manages about $45.5 billion in its asset base and provides exposure to 367 technology stocks. Apple, Microsoft, and Nvidia are the top three firms accounting for a combined 45% of assets. Vanguard Information Technology ETF currently tracks the MSCI US Investable Market Information Technology 25/50 Index and charges 10 bps in fees per year. Volume is solid at nearly 583,000 shares.

Technology Select Sector SPDR Fund (XLK - Free Report)

Technology Select Sector SPDR Fund is the most popular and heavily traded ETF, with AUM of $42.3 billion and an average daily volume of 7 million shares. The fund charges 10 bps in fees per year. Technology Select Sector SPDR Fund follows the Technology Select Sector Index and holds about 66 securities in its basket. Apple, Microsoft and Nvidia make up a combined 51.4% of assets.

iShares US Technology ETF (IYW - Free Report)

iShares Dow Jones US Technology ETF tracks the Russell 1000 Technology RIC 22.5/45 Capped Index, giving investors exposure to 139 U.S. electronics, computer software and hardware, and informational technology companies. Apple, Microsoft, Alphabet Nvidia and Meta Platforms collectively account for half of the portfolio.

iShares Dow Jones US Technology ETF has AUM of $10.1 billion and charges 39 bps in fees and expenses. Volume is good as it exchanges 672,000 shares a day.

VanEck Vectors Semiconductor ETF (SMH - Free Report)

VanEck Vectors Semiconductor ETF offers exposure to the companies involved in semiconductor production and equipment. SMH follows the MVIS US Listed Semiconductor 25 Index, which tracks the most-liquid companies in the industry based on market capitalization and trading volume. VanEck Vectors Semiconductor ETF holds 25 stocks in its basket, with Nvidia comprising 11.3% share. It has managed assets worth $8 billion and charges 35 bps in annual fees and expenses. VanEck Vectors Semiconductor ETF is heavily traded, with a volume of 4 million shares per day (read: A Guide to Semiconductor ETF Investing).

iShares Semiconductor ETF (SOXX - Free Report)

iShares Semiconductor ETF follows the ICE Semiconductor Index and offers exposure to U.S. companies that design, manufacture and distribute semiconductors. It holds 30 securities in its basket, with Nvidia accounting for an 8.8% share. iShares Semiconductor ETF has amassed $7.6 billion in its asset base and trades in a volume of about 1 million shares a day. The product charges a fee of 35 bps a year from investors.

Will Rally Continue?

While big tech might offer some safety in turbulent times, it is not without risk. With the latest surge, tech stocks have become overvalued. The Zacks Tech sector is currently trading at a P/E ratio of 21.42 compared to 17.32 for the S&P 500. About 48% of the industries in the sector have a top Zacks Rank, suggesting some pain ahead (see: all the Technology ETFs here).

Additionally, the earnings outlook for the sector has been clouded by economic concerns. According to Bloomberg Intelligence data, earnings for the technology sector are expected to fall 7.7% in 2023 compared with the growth of 5.2% expected six months ago. The forecasts for revenue growth for the sector have also turned negative over the same period, with consensus moving from a 6% increase to a 0.5% decline.

Further, falling bond yields, a key contributor to the recent rally in technology stocks, could prove short-lived if the Fed keeps raising interest rates. However, four of the five above-mentioned ETFs have a Zacks Rank #2 (Buy), suggesting their outperformance to continue. SOXX has a Zacks Rank #3 (Hold).

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