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How to Short Technology Stocks with ETFs

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The hot and soaring technology sector, which has been a favorite destination for investors this year, has started to lose steam on overvaluation concerns.

The initial panic was triggered on June 9 when the leading investment bank, Goldman Sachs, warned that stock prices of big tech companies have seen a rapid rise. The five biggest technology stocks, better known as FAAMG – Facebook (FB - Free Report) , Amazon (AMZN - Free Report) , Apple (AAPL - Free Report) , Microsoft (MSFT - Free Report) and Alphabet (GOOGL - Free Report) – lost more than $97.5 billion in market value in a single day. These stocks have been the main drivers of the global stock rally this year (read: Move Over FAANGs: China Tech Stocks and ETFs are the Hottest).

The decline was worse this week following bearish analyst reports on the two tech titans. Another analyst Bank of America also believes that tech stocks may be trading at their highest P/E multiple relative to the broader market since the 2000 internet bubble.

The profit-taking activity and sector rotation from high growth to the beaten-down financials and high-dividends like utilities and real estate added to the woes. Notably, the FAAMG has shed about $120 billion in market value over the past five days. Meanwhile, the ultra-popular Select Sector SPDR Technology ETF (XLK - Free Report) topped the list of outflows in a one-week period through June 14, pulling out more than $554 million in capital, as per The fund has declined 3.3% over the past five days.

The negative sentiment is likely to continue at least in the near term given Trump issues and the latest round of weak economic data on jobs, retail and inflation that would result in investors’ flight to value stocks. Additionally, the Fed’s hawkish stance along with weak inflation expectations raised doubts over economic expansion going forward. Further, a strong dollar, growing geopolitics and threats of political instability will hurt worldwide demand and information technology spending, weighing on revenues and the profitability of the big tech companies though industry fundamentals remain encouraging (read: Forget Big Tech, Bet on These Overlooked ETFs).

As per the Zacks Estimate, the tech sector has been trading at a P/E ratio of 23.80, the second highest of all the 16 Zacks sectors, signaling some pain for the coming days.

Given this, investors could easily tap this bearish trend by considering a near-term short on the technology sector. Fortunately, with the advent of ETFs, this is quite easy as there are a few options to accomplish this task. Below we highlight them and some of the key differences between each.

Direxion Daily Technology Bear 1X Shares

This ETF offers unleveraged inverse exposure to the Technology Select Sector Index. It has failed to attract investors as depicted by AUM of just $1 million and average daily volume of under 1,000 shares. The fund charges 45 bps in fees per year and added 3% over the past five days.

ProShares UltraShort Technology (REW - Free Report)

This fund seeks two times (2x) inverse exposure to the Dow Jones U.S. Technology Index, charging 95 bps in fees. It has amassed $2.9 million in its asset base and trades in paltry volume of around 2,000 shares per day on average. REW has returned about 7.5% over the last five days.

Direxion Daily Technology Bear 3x Shares (TECS - Free Report)

Investors with a more bearish view and a higher risk appetite may find TECS interesting as the product provides three times (3x) inverse exposure to the daily performance of the Technology Select Sector Index. It has amassed about $16.8 million in its asset base while charges 95 bps in fees per year from investors. Volume is moderate as it exchanges around 93,000 shares a day on average. The fund has gained 10% in the same time frame (read: Correction in U.S. Tech Sector? Inside Most-Hurt ETFs).

ProShares UltraShort Semiconductors ETF (SSG - Free Report)

This fund targets the semiconductor corner of the broader technology sector as it provides two times inverse exposure to the daily performance of the Dow Jones U.S. Semiconductors Index. It is an unpopular and illiquid choice in the space with AUM of $2.4 million and average daily volume of around 9,000 shares. Expense ratio comes in at 0.95%. The fund has added 11.2% in the same time frame.

Direxion Daily Semiconductor Bear 3x Shares (SOXS - Free Report)

This ETF offers three times inverse exposure to the PHLX Semiconductor Sector Index, charging investors 95 bps in annual fees. It has amassed about $35 million in its asset base while trades in good volumes of 199,000 shares a day on average. The fund has surged 18.7% in the same time frame.

Bottom Line

As a caveat, investors should note that such products are suitable only for short-term traders as these are rebalanced on a daily basis (see: all the Inverse Equity ETFs here).

However, for ETF investors, who are bearish on the technology sector for the near term, either of the above products could make an interesting choice. Clearly, a near-term short could be intriguing for those with high-risk tolerance, and a belief that the “trend is the friend” in this corner of the investing world.

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