The technology sector witnessed a lull in the initial phase of this year due to market correction and global growth worries. But the sector recently gained momentum mainly on a slew of positive earnings releases and the return of risk-on sentiments to the market (after the Brexit induced sell-off) on a flurry of upbeat U.S. economic data.
There are several other factors for which the tech sector may see a solid run ahead. Below we highlight those factors in detail:
Factors in Play
Signs of a recovery in the U.S. economy, though not brisk in every area, are surely more than what we saw early this year. Be it retail, housing or manufacturing, the economy started to show promise all over again. We recently witnessed a rally in the market and if this momentum is maintained, the tech sector which is economically sensitive, may gain traction (read: Do Not Fear Rate Hike; Play with Cyclical Sector ETFs).
The sector’s earnings are expected to decline 3.4% this year as per Earnings Trends report issued on July 21. However, earnings would pick up momentum from next year and are expected to grow as much as 9.8% in 2017. Revenues are also likely to fall 2.9% in 2016 but recoil to 4.4% growth next year.
Out of the 16 S&P sectors, technology is currently reasonably valued with 20.4x and 18.5X P/E respectively for 2016 and 2017 expected earnings. While this is in premium to the S&P index’s 19.2x and 17x P/E, respectively, the valuation lags the forward P/E ratio of consumer staples, retail wholesale, energy and business services.
Another reason to be bullish on the sector is increasing dividends and buybacks by tech companies. Technology stocks have been one of the key drivers of “the S&P 500's dividend growth since the financial crisis,” as per Benzinga (read: An Investor's Guide to Dividend Aristocrat ETFs).
Investors should also note that share buyback was pretty decent in Q1 with repurchases increasing 15.1%. Among the all sectors, Information Technology was at the top in terms of dollar value buybacks ($34.4 billion).
Coming to IPOs, here too the technology sector grabbed the second spot among all sectors, clinching 17 deals with total proceeds of $6.1 billion in the year-to-date frame (as of July 25, 2016).
Which Tech ETFs to Play?
In the entire spectrum, a couple of segments hold promise. These are electronics and semiconductors, going by the Zacks Market Strategy issued on July 14, 2016. Since semiconductor is the value-centric traditional tech area, this tech sub-sector might see gains ahead on demand for its products in emerging technology applications like tablets and smartphones despite still-subdued PC shipments.
Though the world semiconductor market will see a year-over-year decline of 2.4% in 2016, it is likely to enter into the growth territory in 2017 and 2018, as per World Semiconductor Trade (WSTS).
Against this backdrop, we highlight a few ETFs that could be intriguing choices for investors.
First Trust NASDAQ Technology Dividend Index Fund (TDIV - Free Report)
The lure of the fund lies in dividend yield – a prerequisite in the present extremely low-yield environment. TDIV yields around 2.735 annually (as of July 22, 2016) (read: 3 ETFs in Focus as IBM Posts Better-Than-Expected Q2 Results).
iShares PHLX Semiconductor ETF (SOXX - Free Report)
The fund gives exposure to U.S. companies which are into design, manufacture and distribution of semiconductors (read: Why Semiconductor ETFs Are Hitting Highs).
First Trust ISE Cloud Computing Index Fund (SKYY - Free Report)
This is yet another growing field. As per IDC, total IT spending for cloud environments will likely increase 15.5% in 2016 to reach $37.1 billion against a 4.4% decline in enterprise investments in the traditional non-cloud area. Outlays on private cloud IT infrastructure will likely rise 10.3% year over year to $13.8 billion. Needless to say, such growth will definitely put SKYY in focus.
PureFunds ISE Cyber Security ETF (HACK - Free Report)
This cybersecurity ETF is worth a look due to the rising cyber-crime (read: France Bleeds Again: ETFs & Stocks in Focus).
First Trust NASDAQ-100-Technology Sector Index Fund (QTEC - Free Report)
This fund represents almost the entire spectrum of the technology sector with a large allocation to semiconductor (39.87%) followed by software (25.35%) and Internet (25.35%).
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