Technology has turned out to be the most profitable sector so far this year, driven by the artificial intelligence (AI) boom, easing inflation and a surge in “magnificent seven.” Bets that the Fed will soon end its tightening policy have also driven the sector higher. However, the hopes faded in recent months with the expectation of higher rates for longer than expected, pushing the sector down.
The decline seems short-lived per Wedbush analyst Dan Ives, who believes that the technology sector is poised to weather a prolonged phase of increased interest rates. Ives eyes the "biggest tech revolution in 30 years" on the horizon, with the new tech bull market kicking off. The AI mania will continue to accelerate and provide a boost to tech stocks. The global digital shift has enhanced e-commerce for everything, ranging from remote working to entertainment and shopping, thereby bolstering strength in the sector. The rapid adoption of cloud computing, big data, the Internet of Things, wearables, VR headsets, drones, virtual reality, machine learning, digital communication, blockchain and 5G technology should continue to fuel a rally (read: Time for Low-P/E Tech ETFs?). Additionally, any prospective reductions in interest rates – with the market forecasting at least two for the next year – coupled with the ongoing rise of AI will act as a major tailwind. Higher spending across software, semiconductors, and digital media consumer sectors will further provide a boost to the sector. Further, the tech titans have strong balance sheets, durable revenue streams and robust profit margins, making them attractive investments. They are better positioned to withstand a possible economic downturn and have demonstrated improved cost discipline. We have highlighted five best-performing ETFs from the sector that have a solid Zacks ETF Rank #1 (Strong Buy) or 2 (Buy), suggesting outperformance in the month ahead as well. iShares US Technology ETF ( IYW Quick Quote IYW - Free Report) ) – Up 40.7% iShares Dow Jones US Technology ETF tracks the Russell 1000 Technology RIC 22.5/45 Capped Index, giving investors exposure to 135 U.S. electronics, computer software and hardware, and informational technology companies. Apple (AAPL) and Microsoft (MSFT) take the largest share at 18.3% and 16.8%, respectively. iShares Dow Jones US Technology ETF has AUM of $10.9 billion and charges 40 bps in fees and expenses. Volume is good as it exchanges 896,000 shares a day. VanEck Vectors Semiconductor ETF ( SMH Quick Quote SMH - Free Report) ) – Up 38.7% VanEck Vectors Semiconductor ETF offers exposure to the most liquid companies involved in semiconductor production and equipment based on market capitalization and trading volume. SMH follows the MVIS US Listed Semiconductor 25 Index, which measures the overall performance of companies involved in semiconductor production and equipment. VanEck Vectors Semiconductor ETF holds 25 stocks in its basket with heavy concentration on the top two firms – Nvidia (NVDA) and Taiwan Semiconductor (TSM). VanEck Vectors Semiconductor ETF has managed assets worth $9.5 billion and charges 35 bps in annual fees and expenses. SMH is heavily traded, with a volume of 7.5 million shares per day (read: Can Blockbuster Arm IPO Boost Semiconductor ETFs?). Pacer Data and Digital Revolution ETF ( TRFK Quick Quote TRFK - Free Report) ) – Up 37% Pacer Data and Digital Revolution ETF aims to offer investors exposure to globally listed stocks and depositary receipts of data and digital revolution companies. It follows the Pacer Data Transmission and Communication Revolution Index, holding 81 stocks in its basket. Semiconductors takes the largest share at 33.8%, while system software and communication equipment round off the next two spots. Pacer Data and Digital Revolution ETF has accumulated $4.9 million in its asset base and has an expense ratio of 0.60%. TRFK trades in a meager volume of under 2,000 shares per day on average. Invesco NASDAQ Internet ETF ( PNQI Quick Quote PNQI - Free Report) ) – Up 35.9% Invesco NASDAQ Internet ETF follows the Nasdaq CTA Internet Index, which measures the performance of companies engaged in Internet-related businesses listed on the New York Stock Exchange, NYSE American, Cboe Exchange or The Nasdaq Stock Market. The product holds 85 stocks in its basket with a moderate concentration on the top five firms. Invesco NASDAQ Internet ETF has amassed $564.6 million in its asset base and charges 60 bps in fees per year. The fund trades in a light volume of 53,000 shares. First Trust NASDAQ-100-Technology Sector Index Fund ( QTEC Quick Quote QTEC - Free Report) ) – Up 35.8% First Trust NASDAQ-100-Technology Sector Index Fund tracks the NASDAQ-100 Technology Sector Index, holding 38 stocks in its basket with almost equal allocation. From an industry look, software and semiconductors dominate the list with 40.4% and 35.1% share, respectively, while production technology equipment and consumer digital services make up for the next two spots (read: Inverse ETFs to Play If Nasdaq Slumps Ahead). First Trust NASDAQ-100-Technology Sector Index Fund has AUM of $2.8 billion and an average daily volume of around 209,000 shares. It charges 57 bps in annual fees.