Rising rate worries have weighed on the growth stocks in recent weeks. The tech-heavy Nasdaq Composite slumped 1.4% in the past three months (as of Oct 10, 2023) on concerns whether policymakers will enact another hike this year. U.S. benchmark treasury yield hit a high of 4.81% this week before slumping to 4.66% on Oct 10 due to the safe-haven bid.
Meanwhile, the Bank of England indicated that valuations for U.S. technology stocks may be excessively high. According to the Bank's financial policy committee, higher interest rates and uncertainties related to inflation and economic growth have led to stretched valuations for some risky assets,
as quoted on CNBC. These conditions raise the likelihood for a sizable correction in asset prices if downside risks to growth come into play.
The Bank of England points out differences in credit spreads between U.S. Dollar-denominated high-yield and investment-grade bonds and their Euro or Sterling equivalents. Additionally, certain measures of U.S. equity risk premia, which reflect the extra return demanded by investors for taking on risk, remain relatively low. This is mainly attributed to the continued strength of the U.S. tech sector.
Despite some pullback in technology shares due to recent interest rate increases, the price-to-earnings ratios for major tech companies like Microsoft, Alphabet, and Nvidia remain elevated. Microsoft's P/E ratio is at 29, Alphabet's at 21, and Nvidia's at 31, all of which are well above the P/E ratio for the S&P 500, which stands at approximately 18.
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.
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 indicated that AI technology is still in the early stages.
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.
ETFs in Focus Invesco Semiconductors ETF ( PSI Quick Quote PSI - Free Report) – P/E: 13.39X Fidelity Cloud Computing ETF ( FCLD Quick Quote FCLD - Free Report) – P/E: 20.92X First Trust Technology AlphaDEX Fund ( FXL Quick Quote FXL - Free Report) – P/E: 19.23X First Trust NASDAQ Technology Dividend Index Fund ( TDIV Quick Quote TDIV - Free Report) – P/E: 19.33X First Trust Indxx Metaverse ETF ( ARVR Quick Quote ARVR - Free Report) – P/E: 19.97X