The technology sector has been the investors’ darling in the nine-year bull market. But a slew of negative news from some of the key companies in the space have led to a huge decline in large-capitalization technology and Internet stocks, taking away the sheen from the sector.
Fears of a trade war between the United States and China also took toll on the sector. This is because the tech titans do most of their business outside the United States and are highly vulnerable to any political dispute.
Notably, tech stocks saw the largest quarterly drop since 2015. Facebook (FB - Free Report) erased about $50 billion in its market-cap value since the data scandal while Amazon (AMZN - Free Report) wiped out more than $30 billion after a series of allegations from Donald Trump, made via Twitter, on its business practices. Shares of Apple (AAPL - Free Report) and Alphabet (GOOGL - Free Report) are also down on concerns over tighter regulation. Netflix (NFLX - Free Report) , Nvidia (NVDA - Free Report) and Tesla (TSLA - Free Report) are also victims of negative news flowing in the sector (read: Beat the Tech Blues With These Inverse ETFs).
As a result, the S&P 500 Information Technology index was down more than 7% from its latest Mar 12 peak. However, long-term investors could consider this slump a buying opportunity given easing trade fears and a rebound the tech sector, in yesterday’s trading session.
Reasons to Buy
Despite the current slide, the outlook for the sector is quite promising. This is especially true as technology is still clearly outpacing the broad market index from the year-to-date look. In fact, the index enjoyed a strong rally over the past five years with an annualized return of 19.1% versus 11.1% for the S&P 500 index.
This trend is likely to continue thanks to the twin tailwinds of Trump’s tax reform and a rising interest rate scenario. This is because tech titans hoard huge cash overseas and are poised to benefit the most from reduced tax rates. These companies are sitting on a huge cash pile and are in a position to increase payouts to their shareholders. Additionally, the sector’s cyclical nature will allow it to perform well in a maturing economic cycle.
Further, the emergence of cutting-edge technology such as cloud computing, big data, Internet of Things, wearables, VR headsets, drones, virtual reality, and artificial intelligence as well as strong corporate earnings are acting as the key catalysts. The Q1 earnings for the tech sector is expected to grow 20.7% on 11.4% revenue growth (see: all the Technology ETFs here).
Given the promising long-term trends and the sector’s high growth potential, technology stocks are due for a rebound and will likely move higher this earnings season. While individual stock investing is certainly an option, a look at the top-ranked tech ETFs could be a lesser risky way to tap the same broad trends.
Top ETF Choices
We have found a number of ETFs that have the top Zacks ETF Rank #1 (Strong Buy) or 2 (Buy) in the space and that are expected to outperform in the months to come. These have gained the most from the sector’s rebound in yesterday’s trading session and thus have superior weighting methodologies, which could allow them to continue leading the tech space higher (read: all the Top Ranked ETFs).
First Trust Nasdaq Semiconductor ETF (FTXL - Free Report)
This fund offers exposure to the most-liquid U.S. semiconductor securities based on volatility, value and growth by tracking the Nasdaq US Smart Semiconductor Index. Holding 30 stocks in its basket, it has diverse exposure across components with each holding less than 8.8% of the assets. FTXL has accumulated $46.1 million in AUM and charges 0.60% in expense ratio. It gained 1.5% in yesterday’s trading session and has added 7.2% in the year-to-date time frame. The fund has a Zacks ETF Rank #1 (read: 6 Solid Reasons Why You Should Buy Semiconductor ETFs).
PowerShares Dynamic Software Portfolio (PSJ - Free Report)
With AUM of $143.6 million, this product target software corner of the broad technology space and follows the Dynamic Software Intellidex Index. Holding 30 securities in its basket, it is well spread across components with none accounting for more than 5.5% of assets. Expense ratio comes in at 0.63%. The product added 1.9% in yesterday’s trading session and is up 9.6% in the year-to-date time frame. It has a Zacks ETF Rank #2 (read: 4 Sector ETFs That Crushed S&P 500 in 9-Year Bull Run).
SPDR NYSE Technology ETF (XNTK - Free Report)
This product provides exposure to purely electronics-based technology companies by tracking the NYSE Technology Index. It holds 35 stocks in its basket with none accounting for more than 4.2% of assets. The ETF has amassed $900.4 million and charges 35 bps in annual fees. It rose 3.7% yesterday and is up 5.7% so far this year. The fund has a Zacks ETF Rank #2.
iShares Dow Jones US Technology ETF (IYW - Free Report)
This ETF offers broad exposure to technology stocks by tracking the Dow Jones U.S. Technology Index and holds 136 stocks in its basket. It is heavily concentrated on the top two forms – Apple and Microsoft – with 16.6% and 13.5% share, respectively, while other firms hold less than 7.3% share. From an industrial look, more than half of the portfolio is dominated by software and services, closely followed by hardware & equipment at 25.4%. The fund has AUM of $4 billion and charges 44 bps in fees and expenses. IYW gained 1.5% in yesterday’s trading session and 3.5% from a year-to-date look. It has a Zacks ETF Rank #2 (read: 5 Reason Why FANG ETFs Lost Their Charm in March).
First Trust NASDAQ-100-Technology Sector Index Fund (QTEC - Free Report)
This ETF offers broad exposure to the technology sector by tracking the NASDAQ-100 Technology Sector Index. It holds 37 stocks in its basket with each holding less than 3% share. Semiconductors account for the largest share at 41.4%, followed by software (34.2%) and Internet (10.3%). QTEC has AUM of $2.4 billion and charges 60 bps in annual fees. The fund added 1.4% yesterday and is up 5.7% so far this year. It has a Zacks ETF Rank #2.
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