This year, the Nasdaq Composite has been the best-performing among the top three U.S. indices with year-to-date returns of 8.6%, which trumped the Dow Jones’ flat return and the S&P 500’s 1.9% gains. Maintaining the winning trend, the tech-heavy Nasdaq index hit another record high of 7,606.46 on Jun 4, 2018.
FANGs Rebound to All-Time High on Compelling Valuation
FANGs suffered in Marchthanks to Facebook (FB - Free Report) data breach reports and the consequent apprehensions over stricter regulations in the social media space.Nvidia NVDA’s announcement that it will suspend self-driving car tests on public roads, short-selling pressure on Twitter (TWTR - Free Report) and insane valuation of Netflix also hit the tech space hard in March. The Nasdaq composite dived 6.9% in March from the month’s high of 7588.319824 hit on Mar 12. (read: 5 Reason Why FANG ETFs Lost Their Charm in March).
Now, putting all these worries into the back burner, the sector once again recoiled in full strength. FAANG members like Apple (AAPL - Free Report) , Amazon (AMZN - Free Report) and Netflix (NFLX - Free Report) all hit new highs on Jun 4, cashing on compelling valuation. Other tech names touching all-time highs on Jun 4 were Microsoft (MSFT - Free Report) , Electronic Arts (EA - Free Report) and Adobe (ADBE - Free Report) (read: Is the Rout in Tech ETFs Transitory?).
Cyclical Nature of the Sector
A pickup in the global economy is great for a cyclical sector like technology. Such sectors perform better in a rising rate environment that we are witnessing currently in the United States. The Nasdaq index also has considerable weight in another cyclical sector Consumer Discretionary. After all, with U.S. economic growth at a solid clip and job growth steady, it makes sense to ride out the amazing growth momentum (read: What Rising Rates? Play These Cyclical ETFs).
Trump Tax Reform
Investors should note that tech behemoths hoard huge cash overseas and are poised to benefit the most from Trump's repatriation tax policy. Also, investors expect higher dividend distribution or share buyback from this move, which is pushing tech stocks higher (read: How Will Tax Reform Affect Buyback and Dividend ETFs?).
The technology sector (98.4% companies have already reported) came up with an earnings beat ratio of 86.9% and revenue beat ratio of 90.2% in Q1. Tech earnings witnessed about 30.8% jump in the quarter on 13% higher revenues, per the Earnings Trends issued on May 31, 2018.
On the other hand, Consumer Discretionary (97.2% companies reported so far) logged 82.9% earnings beat ratio and a 68.6% revenue beat ratio. The sector’s earnings and revenue growth was 15.1% and 5.8%, respectively.
ETFs to Play
For investors interested in riding out this uptrend in Nasdaq, we suggest five ETFs that track this key American tech-heavy index.
PowerShares QQQ ETF (QQQ - Free Report)
The underlying Nasdaq-100 Index includes 100 of the largest domestic and international nonfinancial companies listed on the Nasdaq Stock Market based on market capitalization. The fund charges 20 bps in fees.
Fidelity Nasdaq Composite Index Tracking ETF (ONEQ - Free Report)
This fund follows the Nasdaq Composite Index. Cash takes the top spot with nearly 11.23% share of assets, followed by Apple (6.41%), Microsoft (5.76%) and Amazon (5.09%). It charges investors 21 bps in fees per year.
First Trust NASDAQ-100 Equal Weighted Index Fund (QQEW - Free Report)
The fund looks to replicate the performance of the NASDAQ-100 Equal Weighted index. The fund appears heavily invested in the Technology sector with about 36% allocation, followed by about 24.2% in Consumer Services, 19.1% in Health Care and 10.6% in Industrials. The fund charges 60 bps in annual fees.
Direxion NASDAQ-100 Equal Weighted Index Shares QQQE
The underlying NASDAQ 100 Equal Weighted Index includes 100 of the largest non-financial securities listed on NASDAQ, but instead of being weighted by market capitalization, each of the constituents is initially set at 1.00%. The fund charges 35 bps in fees.
ProShares UltraPro QQQ (TQQQ - Free Report)
The fund offers triple leverage exposure to the NASDAQ-100 Index and charges 95 bps in fees.
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