The technology sector, which has showed immense strength in face of the trade and tariff threats on FANG surge, lost some ground following the news of a potential curb in Chinese investment.
The Trump administration is seeking to limit many Chinese companies from investing in U.S. technology firms and block additional technology exports to that country. The Treasury Department is working on the rules to block companies with at least 25% Chinese ownership from buying companies involved in "industrially significant technology.” The measures are expected to be announced by the end of this week and are intended to counter Beijing's Made in China 2025 strategic plan. Under this plan, China wants to become a global leader in 10 broad areas of technology, including robotics, aircraft and aircraft components, advanced rail equipment, electrical-generation and transmission equipment and pharmaceuticals and advanced medical devices.
As such, the potential move will hurt the tech sector more broadly than just the semiconductors and hit revenue, earnings, and stock prices of the tech titans having significant exposure to China (read: Chip ETFs Tumble as Trade Fears Intensify: Time to Buy?).
However, the sector fundamentals remained strong as fast-growing, cutting-edge technology such as cloud computing, big data, Internet of Things, wearables, VR headsets, drones, virtual reality, and artificial intelligence are acting as the key catalysts. Additionally, the twin tailwinds of Trump’s tax cuts and a rising interest rate scenario will fuel growth.
That being said, investors could definitely tap the current dip in the basket form. While most of the ETFs in this space have a solid Zacks ETF Rank #1 (Strong Buy) or #2 (Buy), we have highlighted three funds that have moved to this level by two notches from a Zacks ETF Rank #3 (Hold) in the latest ratings update. The system looks to take into account a variety of factors, such as industry outlook and expert surveys; and then apply ETF-specific factors (like expense ratios and bid/ask spreads) in order to find the best funds in each segment.
Below, we have highlighted the three ETFs that offer a great upside potential despite the looming trade war fears (read: Top-Ranked Sector ETFs to Buy for Q3):
Invesco NASDAQ Internet ETF (PNQI - Free Report)
This fund offers exposure to the largest and most liquid U.S.-listed companies engaged in Internet-related businesses by tracking the Nasdaq Internet Index. It holds about 95 stocks with FANGs, whose business is largely immune to trade and tariffs, given their leadership and strength in their key industries, accounting for nearly 32.7% of the portfolio (read: Tech ETFs Scaling New Highs on Surging FANG Stocks).
From an industrial exposure, Internet software & services account for 55% of the portfolio, closely followed by 34.7% in Internet & direct marketing retail. The ETF has AUM of $666.9 million and charges 60 bps in fees per year. It trades in a lower volume of around 47,000 shares a day.
Invesco Dynamic Networking ETF (PXQ - Free Report)
This product targets the networking segment of the broad U.S. technology sector by tracking the Dynamic Networking Intellidex Index. Holding 30 securities in its basket, the fund is well spread across each component as each security accounts for no more than 5.25% share. This suggests no concentration issue and a well-diversified portfolio.
In terms of industrial exposure, communication equipment makes up for 44% of the portfolio while software & programing takes the second spot at 27%. PXQ is unpopular and illiquid in the broad tech space with AUM of $62.1 million and average daily volume of about 11,000 shares. It charges 63 bps in annual fees.
Vanguard Information Technology ETF (VGT - Free Report)
This fund offers exposure to a broad technology sector, holding 356 stocks in its basket with heavy exposure to Apple (AAPL - Free Report) and Microsoft (MSFT - Free Report) that account for 14.5% and 11.1% share, respectively. Other FANG stocks – Alphabet (GOOGL - Free Report) and Facebook (FB - Free Report) – make up for the next two spots (read: Microsoft Shares Touch Triple Digits: 5 Tech ETFs to Bet On).
The ETF has nice allocation across various industries with technology hardware, storage & peripheral; systems software; semiconductors; Internet software & services; and data processing & outsourced services making up for double-digit exposure each. The product currently follows the MSCI US Investable Market Information Technology 25/50 Transition Index and manages about $20.5 billion in its asset base. It has 0.10% in expense ratio, while volume is solid at nearly 654,000 shares.
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