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Is The Bull-Run for Tech ETFs Over?

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Wall Street has been reacting to latest reports involving a data breach at Facebook (FB - Free Report) . The social media company is bearing the brunt of investors as it responds to criticism on its management of user data. Moreover, a potential slowdown in acquisitions in the tech sector, stricter government regulations and supply chain worries for Apple weighed on the sector.

What’s Driving Tech Lower?

Facebook plunged following a report that data mining firm Cambridge Analytica, the firm that worked for President Trump’s campaign, unethically obtained data from around 50 million Facebook users without their permission.

Facebook stated that Cambridge obtained data from 270,000 people, who downloaded a purported research app that was described as a personality test and were reportedly paid for the test. The data was collected through an app called thisisyourdigitallife, built by academic Aleksandr Kogan. However, the app also collected information on the test takers’ friends, leading to accumulation of data on millions of users. This discovery is the latest development in understanding the role Facebook played in influencing voter sentiment in the 2016 United States general election.

Per a Reuters article, citing Jennifer Sireklove, director of responsible investing at Seattle-based money manager Parametric, multiple ethics focused investors are avoiding social media companies owing to their handling of user data. “More investors are starting to question whether these companies are contributing to a fair and well-informed public marketplace, or are we becoming all the more fragmented because of the ways in which these companies are operating,” Jennifer said.

The tech sector is also witnessing a slowdown in acquisitions. “A lot of the high-growth tech stories from 2017 are starting to break down. Semis are clearly now at risk of trade wars. M&A was a big supporter of the group, and that story is crumbling,” per a Reuters article, citing Joel Kulina, a trader at Wedbush.

Moving on to Apple, the company reported supply chain violations in a report in the second week of March. In its audit, Apple found out serious violations with regard to labor and environmental policies for suppliers. In 2017, 44 core violations were uncovered related to labor and human rights, double that from 2016, which is weighing on the company’s public image.

On the regulation front, Europe is aiming to impose stricter regulations to give users more control over their data by implementing the General Data Protection Regulation. Investors are worried that in case regulators start imposing restrictions on Facebook, it might have a domino effect and affect other tech sector giants as well.

In the current scenario, we believe it is prudent to discuss the following ETFs that focus on providing exposure to the tech sector (see all Technology ETFs here).

Technology Select Sector SPDR Fund (XLK - Free Report)

XLK is a relatively cheaper bet on the technology sector. This fund has AUM of $22.2 billion and charges a fee of 13 basis points a year. From a sector look, Software, Internet Software and Services and Technology Hardware Storage & Peripherals have the highest exposure to the fund, with 20.5%, 18.8% and 16.7% allocation, respectively (as of Dec 31, 2017). The fund has 14.2% exposure to Apple Inc (AAPL - Free Report) and 6.6% to Facebook Inc. The fund has returned 29.4% in a year and 6.7% year to date. XLK has a Zacks ETF Rank of #2 (Buy), with a Medium risk outlook.

Global X Social Media Index ETF (SOCL - Free Report)

This fund provides exposure to the global social media sector. It has AUM of $229.8 million and charges a fee of 65 basis points a year. The fund has 8.4% exposure to Facebook Inc. The fund has returned 54.1% in a year and 14.1% year to date. SOCL has a Zacks ETF Rank of #3 (Hold), with a High risk outlook.

First Trust Dow Jones Internet Index (FDN - Free Report)

This fund is one of the most popular bets on the internet segment of technology sector in the U.S. It seeks to invest in companies that derive at least 50% of its revenues from the internet. It has AUM of $7.3 billion and charges a fee of 54 basis points a year. From a sector look, Information Technology, Consumer Discretionary     and Financials have the highest exposure to the fund, with 70.0%, 20.6% and 5.3% allocation, respectively. The fund has 8.4% exposure to Facebook Inc.  The fund has returned 43.6% in a year and 15.5% year to date. FDN currently has a Zacks ETF Rank of #2, with a High risk outlook (read: Best Performing ETFs of 9-Year Bull Run).

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