Rising rate worries are back and have weighed on the growth stocks, as expected. The tech-heavy Nasdaq Composite slumped for a fourth session on Thursday on concerns whether policymakers will enact another hike this year. U.S. benchmark treasury yield touched 4.30% on Sep 6, after starting the month at 4.18%.
The tech-heavy Nasdaq Composite index is off about 2% past week while up 31.4% this year. In the past three months, the index has added only 3.9%. Notably, the tech stocks had a stupendous rally this year on the AI boom. This triggers a question how long the rally will continue?
Per Aswath Damodaran – known for his notable work in the field of investment valuation, “tech stocks are likely overvalued and will run out of steam by year-end,”
as quoted on CNBC. How to Play Tech Space Now?
In the dynamic world of investing, strategies come and go, but one strategy that has proven its worth over the years is value investing. Value investing involves seeking out stocks trading below their intrinsic value, with the expectation that the market will eventually recognize and correct this undervaluation.
If you are also worried about the overvaluation in the tech space, you can consider investing in low-P/E tech ETFs. This way, you can stay invested in this high-growth sector while tapping into high-value opportunities.
Although 93% of traders anticipate a rate pause during the September Federal Open Market Committee meeting, the possibility of future rate hikes still remains a consideration. Expectations for an additional increase in November have risen to roughly 43%, according to the CME Fed Watch tool.
Don’t Dump Tech: Tap High Value Ones
“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 and the ongoing emergence of AI, machine learning and IoT are the winning areas. Strong focus on AI techniques like ChatGPT and the home automation space should favor the technology sector. NVIDIA recently indicated that AI technology is still in the early stages (read:
Guide to Artificial Intelligence ETFs).
Then there is the banking sector’s weakness. Half of America's banks are at risk of insolvency due to the collision of the crashes in the U.S. real estate and bond markets. Such crisis, if at all it happens, might lead investors to look for a safe haven in the equity space. In this pursuit, tech ETFs should emerge as winners.
ETFs in Focus
Against this backdrop, below we highlight a few tech ETFs that have a lower P/E than the largest tech ETF Technology Select Sector SPDR Fund (XLK)’s P/E of 23.77X.
Fidelity Cloud Computing ETF ( FCLD Quick Quote FCLD - Free Report) – P/E: 20.92X
The underlying Fidelity Cloud Computing Index reflects the performance of a global universe of companies across the market capitalization spectrum that provide products or services enabling the increased adoption of cloud computing, characterized by the delivery of computing services over the internet. The fund charges 39 bps in fees.
First Trust Technology AlphaDEX Fund ( FXL Quick Quote FXL - Free Report) – P/E: 19.23X
The underlying StrataQuant Technology Index is a modified equal-dollar weighted index designed by the AMEX to objectively identify and select stocks from the Russell 1000 Index that may generate positive alpha relative to traditional passive style indices through the use of the AlphaDEX screening methodology. The fund charges 61 bps in fees.
First Trust NASDAQ Technology Dividend Index Fund ( TDIV Quick Quote TDIV - Free Report) – P/E: 19.33X
The underlying NASDAQ Technology Dividend Index includes up to 100 Technology and Telecommunications companies that pay a regular or common dividend. The fund charges 50 bps in fees.
First Trust Indxx Metaverse ETF ( ARVR Quick Quote ARVR - Free Report) – P/E: 19.97X
The underlying Indxx Metaverse Index is rules-based and invests in the next generation of the Internet, which has the potential to allow creators to build the next chapter of human interaction through immersive experiences in three-dimensional virtual spaces. The fund charges 70 bps in fees.
iShares Semiconductor ETF ( SOXX Quick Quote SOXX - Free Report) – P/E: 20.34X
The underlying ICE Semiconductor Index measures the performance of U.S. traded securities of companies engaged in the semiconductor business. The fund charges 35 bps in fees.