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5 Reasons Why the Tech ETF Boom is Here to Stay

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So far, in the second half of 2016, the technology sector or tech stocks have had quite an impressive run on the bourses. According to Bank of America Merrill Lynch data, for the week ended September 21, 2016, funds that invest in tech stocks raked in $900 million despite the fact that investors pulled a total of $7.4 billion from global equities during the same week.

At present, the tech sector constitutes 20.7% of the S&P 500 index, well ahead of Financials (15.8%) and Healthcare (15.2%). This is the largest share the tech sector has held since the bursting of the dot-com bubble in the 2000s. We believe that the tech sector momentum will continue in the rest of 2016. Here, we briefly discuss five reasons for that:

Massive Demand of Smartphone and Apps

Advanced smartphone and tablet devices are much in demand as is evident from the momentous success of the recently launched iPhone by Apple Inc. Strong demand for Apple’s newly released iPhone 7 Plus and iPhone 7 played a major role in boosting shares of the tech behemoth over the past few sessions. (read: Catch Apple's Rally with These Top-Ranked Tech ETFs).

More smartphones in the market are in turn generating demand for latest handheld devices and apps. Rapid growth of 4G LTE and upcoming 5G networks will only fuel significant growth of Internet-enabled gadgets and apps.

Internet of Things: Prospects Bright

Internet of Things (IoT), which enables any physical electronic device with a valid IP-address to transfer data seamlessly over a wireless network, is rapidly gaining market traction and is bringing about fundamental changes in business models. Meanwhile, the next-generation mobile networks (4G LTE, LTE-A, upcoming 5G) will provide the primary impetus to the tech industry. In this context, IoT holds potential to be the numero uno factor in driving growth in the space. IoT is a network of physical objects embedded with electronics, software, sensors and connectivity that facilitates it to achieve greater value and service by exchanging data with other connected devices. (read: Invest in the Internet of Things with This ETF).

Fed Holds off Interest Rate Hike

The Fed stayed put in its September meeting, keeping the rates unchanged in the 0.25–0.50% band. The Fed maintained its confident outlook on the U.S. economy but preferred to wait before implementing a rate hike until it sees signs of continued advancement. Since the world was betting on a dovish from the Fed, the stock market bounced back post the meeting. Bank of Japan also came up with fresh changes in monetary stimulus on the same day, thus lifting the global markets. (read: Fed Plays Safe As Expected, Outlook Positive: ETFs to Buy).

The first half of 2016 proved exceptionally good for the defensive sector like telecom and utility, following fears over the global growth outlook.

Consequently, shares of telecom and utilities companies had gained more than 20% up to August and their valuation became a concern by that time. Meanwhile, Fed’s decision to hold interest rate firm and a more stable global economy have shifted investor’s focus toward the technology sector, which is traditionally aggressive in nature.

High Dividend Yield

Traditionally, the tech sector has long been known of its growth companies that offered little dividends and are more interested in reinvesting their cash in the businesses. Nevertheless, that trend has changed a long way in recent years which has become a boon for several ETFs. Technology companies began to compensate shareholders during the financial crisis of 2008 – 2010 as several sector participants were heavily cash rich by that time. This trend is still in vogue. In fact, in dollar terms, technology is now the largest dividend-paying sector in the U.S.

Social Media Gains Popularity

Accessing social media and social networking through Internet-enabled devices has become a well establish trend globally. Not only that, the social media dynamics is gradually shifting from  Instagram’s major newsfeed algorithm shuffle to Snapchat influencing vertical videos in mainstream advertising. Moreover, live streaming apps and live video are likely to take centre-stage in the near future. Further, as advertising becomes more targeted, users will be habituated to the idea of buying things on social media which will open up social commerce as another growth area.

ETFs in Focus

Below we highlight a few ETFs which have strong focus on the technology sector:

Technology Select Sector SPDR Fund (XLK): This ETF, before expenses, seeks to closely match the returns and characteristics of the S&P Technology Select Sector Index.  The fund manages an asset size of nearly $12,654 million and an average daily trading volume of 9,443,570 shares. The fund charges an expense ratio of 14 basis points (bps) a year. XLK is up 11.8% so far this year (as of September 27, 2016).

Vanguard Information Technology ETF (VGT): This fund seeks to track the performance of the MSCI US Investable Market Information Technology 25/50 Index. The fund manages assets worth $9,900 million and an average daily trading volume of 358,301 shares. The fund charges an expense ratio of 10 bps a year. VGT has rallied 10.7% so far in 2016 (as of September 27, 2016).

Global X Social Media Index ETF (SOCL): This ETF seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Solactive Social Media Index.  The fund manages an asset size valued more than $139.82 million and an average daily trading volume of 48,148 shares. The fund charges an expense ratio of 65 bps a year. SOCL is up 26.4% so far this year (as of September 27, 2016).

iShares U.S. Technology ETF (IYW): This ETF seeks investment results that correspond generally to the price and yield performance of the DOW JONES US TECHNOLOGY INDEX. The fund manages an asset size of almost $2,739 million and an average daily trading volume of 241,264 shares. The fund charges an expense ratio of 43 bps a year. The fund is up 10.3% so far this year (as of September 27, 2016).

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