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Tech ETFs Tumble: Should You Buy the Dip?

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The hot and soaring technology sector lost its momentum with the start of September. This is especially true as the ultra-popular Select Sector SPDR Technology ETF (XLK - Free Report) has dropped about 2.3% so far this week.

The first round of selling came on congressional scrutiny of social media companies and fears of new regulation. Executives from Facebook (FB - Free Report) and Twitter (TWTR - Free Report) testified in front of U.S. lawmakers regarding their measures to combat foreign efforts to influence U.S. politics. The move has raised worries over tighter regulations as the U.S. Department of Justice would discuss concerns that social media platforms are "intentionally stifling the free exchange of ideas" in a meeting on Sep 25. As such, the broad tech sector logged its worst single-day decline since late July on Sep 5.  

A day after, Morgan Stanley’s warnings led to decline in chip stocks. The major Wall Street firm cited weakness in demand for both memory chips — DRAM and NAND — as higher inventory and pricing pressures are building up in the space. Additionally, Micron (MU - Free Report) and KLA Tencor’s cautious outlook at the Citi Global Technology Conference in New York City added to the woes with the PHLX Semiconductor Index dropping 2.7% on Sep 6 (read: Bet on Quality ETFs & Stocks to Fight Volatility).

Moreover, trade tensions between the United States and China remained an overhang on the tech stocks. Trump is looking to implement another tariff on $200 billion in Chinese goods as soon as a public-comment period concludes on Sep 7 at midnight. China has warned of retaliation if the United States slaps new tariffs.

Tech ETFs Performance

Among the worst performers, Global X Social Media ETF (SOCL - Free Report) and ARK Innovation ETF (ARKK - Free Report) stole the show, tumbling 5.4% each so far this week. This was followed by declines of 4.6% for Invesco Nasdaq Internet ETF (PNQI - Free Report) , 4.2% for First Trust Nasdaq Semiconductor ETF (FTXL - Free Report) , 4.2% for Ark Web X.0 ETF (ARKW - Free Report) and 3.9% forFirst Trust Dow Jones Internet Index Fund (FDN - Free Report) .                

SOCL, PNQI and FDN targets the Internet corner of the broad tech space, while FTXL offers exposure to the semiconductor space. The other two, ARKK and ARKW, focus on ‘‘disruptive innovation’’ — the introduction of a technologically enabled new product or service that potentially changes the way the world works (read: Social Media Dives: Time to Buy the Dip With ETFs?).

Most of the other ETFs also saw terrible performances, declining in a range of 2-3%.

Should You Buy the Dip?

Despite the slide, the technology sector is still the best performing sector of this year and is enjoying the longest bull run. The trend is likely to continue in the months ahead given expectations of strong earnings, improved overseas demand and innovative technologies (read: 4 Sector ETFs That Crushed S&P 500 in Longest Bull Market).

The emergence of cutting-edge technology such as cloud computing, big data, Internet of Things, wearables, VR headsets, drones, virtual reality, and artificial intelligence (AI) are acting as the key catalysts. Additionally, the twin tailwinds of Trump’s tax reform plan and a rising interest rate scenario are pushing the stocks higher.

This is because tech titans hoard huge cash overseas and are poised to benefit the most from the reduced tax rates. Most of the tech companies are sitting on a huge cash pile and are in a position to increase payouts to their shareholders. The cash reserves will ensure that these companies are not plagued by financial trouble in a rising interest rate environment.

Adding to the strength is a pickup in the economy and better job prospects that are giving a solid boost to the economically sensitive growth sectors like technology, which typically perform well in a maturing economic cycle (read: Move Over FANGs, FinTech ETF is Hot Now).

Moreover, a brutal decline has made most of the tech stocks cheap at the current levels, offering a nice entry point for investors. As a result, investors could do some bargain hunting in the basket form via ETFs. Notably, most of the ETFs have a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold).

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